STRONGER independent forecasts for economic growth and lower public borrowing projections should arm the Chancellor with a £6 billion warchest for pre-election giveaways in this week’s Budget, an influential think-tank will predict tomorrow.
But the political constraints of a coalition government ahead of one of the most uncertain general elections in decades are likely to mean George Osborne banks most of the windfall until after the voting in May, the EY Item Club is set to say.
The forecaster, which uses the Treasury’s own economic computer model, will suggest it is far more likely that the Chancellor unveils a modest “caretaker Budget” on Wednesday. That way the windfall from stronger GDP and lower government borrowing can be put aside as “dry powder” until after the election when any substantive policy decisions will be made.
The think-tank’s latest report is set to say Osborne will cite at Wednesday’s Budget an expected upgrade of GDP forecasts for 2015 by the independent Office for Budget Responsibility (OBR) from 2.4 per cent to closer to 3 per cent.
Stronger tax revenues and lower inflation, the latter largely due to the slump in the oil price, are expected to have produced a favourable backdrop for lower government spending on debt interest payments.
The EY Item Club report will say that the OBR is set to revise down its forecast for borrowing in 2014-15 from £91.3bn to £89bn to take account of better VAT receipts as consumers have capitalised on real wage increases to boost their spending.
The think-tank expects such continuing factors will encourage the OBR to further lower its forecast for public borrowing by £6bn in 2015-16. EY, along with other major British accounting firms and leading City economists, expect Osborne to provide additional relief for the North Sea energy industry this week in the wake of the oil price slide, most likely in the form of lower corporation tax for companies investing in the region.
The Chancellor has been examining a further cut in the headline tax rate on North Sea oil producers in the Budget, a move that would ease the impact of the collapse in crude prices which industry operators say has rendered a third of UK fields uneconomic.
In his Autumn Statement Osborne went some way towards meeting industry calls to reverse his tax raid on North Sea oil and gas producers in 2011 by cutting the supplementary charge on profits from 32 per cent to 30 per cent.
Neil Bruce, head of the resources, environment and water division at the SNC-Lavalin construction and engineering group, said: “Any respite the Chancellor can provide for North Sea oil and gas will be warmly welcomed by the industry, and hopefully the country as a whole. Luckily Mr Osborne is not short of options. He could reduce the supplementary charge or even scrap it altogether. There is also scope to extend the tax relief on decommissioning expenses.”
Elsewhere, the Confederation of British Industry (CBI), has urged the Chancellor to prioritise measures to help the country’s medium-sized businesses – the so-called “UK Mittelstand” mirroring the dynamic German middle-size sector – to grow.
“This is a good opportunity for the Chancellor before the election to support growth and investment well beyond the general election, providing stability, certainty and simplicity for the UK’s ‘Mittelstand’ to get themselves on the front foot,” John Cridland, the CBI director-general, has said.