Osborne is urged not to 'waste' £8bn tax windfall

GEORGE Osborne is set to enjoy a surprise £8 billion windfall this year thanks to higher tax revenues and greater than expected restraint in spending, the influential Ernst & Young Item Club has calculated.

But the group of economists today warns the Chancellor not to squander the saving with any politically-motivated giveaways in Wednesday's Budget as the coalition government promises a package to boost growth and jobs.

The Item Club expects public-sector net borrowing in the current fiscal year to sharply undershoot the Office for Budget Responsibility's (OBR) forecast as the government has cracked down on current and capital spending.

HM Revenue & Customs receipts for the fiscal year, which ends on 31 March, are also forecast to be 4bn ahead of target following a significant boost in income tax, in particular. Growth in income tax is expected to account for around 3bn of the 8bn overshoot.

The Item Club research chimes with similar calculations from other economists, including Citigroup Global Markets' Michael Saunders, who believes the public deficit will be 10bn lower than OBR forecasts.

However, Andrew Goodwin, senior economic advisor to the Item Club, said Osborne should not be lured into a sense of complacency by the windfall. Goodwin said it was still too early to judge whether the improved fiscal position could be sustained over the rest of the parliament.

The OBR is tipped to slash its GDP expectations this week for 2011 from 2.1 per cent to 1.7 per cent. "It is still very early days on the long and challenging road to fiscal balance," Goodwin added.