He certainly needs to do something bold and unexpected. Budget fatigue is setting in. This is the fourth UK budget statement in just over a year, analysis of the November Autumn Statement having barely died down.
What could possibly have changed – or changed that much – since he delivered all those forecasts just before Christmas?
Well, quite a lot – and none of it to the Chancellor’s advantage. Worries over global slowdown continue to crowd in. Latest surveys on UK manufacturing and services show a marked slowdown. Figures on government borrowing and debt have disappointed. And immediately ahead looms the referendum on our EU membership on 23 June, with attendant uncertainties likely to put a brake on investment and spending.
Growth forecasts just four months ago are already looking set to be missed. This is the daunting backdrop for Osborne. And arguably the biggest disappointment for him is the poor showing across the service sector – for long the mainstay of the UK economy.
What to do? Time, surely, to invoke the spirit of the French army general Ferdinand Foch: “My centre is giving way, my right is retreating, situation excellent, I am attacking…!”
Osborne needs to do something to address the slowdown and boost flagging household morale. Last week the latest Purchasing Managers Report showed services expansion slowing in February to a near three-year low. This followed corresponding surveys showing manufacturing activity slowing to a 34-month low and construction activity to a ten-month low.
Economic growth in the final three months of 2015 was entirely dependent on the services sector. Now the latest PMI reading is that service sector activity fell back to 52.7 in February from 55.6 in January. What’s more, incoming new business growth moderated to a 15-month low in February while employment growth in the sector was the lowest since August 2013.
Separately, the GfK index of UK consumer confidence fell back markedly in February to be at a 14-month low. We now seem to be trapped in a negative feedback loop: bad news feeding on bad news.
Confidence was primarily dragged down last month by sharply lower perceptions of the economy’s performance over the past 12 months and the outlook for the next 12 months. This could well reflect increasing concerns over both the domestic and global economic environment, as well as recent financial market turmoil.
As if all this was not enough, latest figures on the public finances hardly show much room for a tax-cutting budget. While January saw the budget deficit down by 13.7 per cent over the first ten months of the fiscal year 2015-16 to £66.5 billion, Osborne needs to see the deficit of £7bn in February and March to meet the targeted Public Sector Net Borrowing figure of £73.5bn.
That looks a tall order, with North Sea oil revenues way down and tax receipts elsewhere having to hold up despite the evidence of activity slowdown. Corporation tax receipts are already showing a 7.8 per cent dip year-on-year.
As for the government’s overall debt figure, this is still mountainous at £1.599bn for 2015-16 (82.5 per cent of GDP), while annual debt interest for 2016-17 is set to rise from £46.5bn to £51bn.
The case for an income tax cut looks hopelessly weak… but for figures from HMRC last week that bolstered Conservative calls for tax reduction. These showed that, far from the cut in the top rate of tax from 50p to 45p costing the Exchequer £2bn a year as the Labour opposition had feared, the tax take from those earning over £150,000 didn’t go down – it went up – by £8bn.
A classic example, say the tax cutters, of the famous Laffer Curve in action: once the income tax rate reaches a certain level, further increases work to reduce tax revenue, while a cut boosts work incentives and encourages investment and growth.
Labour opponents say the extra revenue was coincidental, not a result of cause and effect, and that it also reflected higher rate taxpayers delaying settlement payments for a year due to tax changes elsewhere.
Nevertheless, the reduction in the top rate did work to curb an entrepreneurial exodus. And international survey evidence overwhelmingly points to tax rises having a negative effect on growth. These range from small effects on GDP growth to more significant downturns in investment levels, output per worker and growth rates – up to 2 per cent annually.
Meanwhile, there is a strong likelihood that the Office for Budget Responsibility will have to downgrade its forecasts given that growth is set to slow in the first quarter from 0.5 per cent in the final three months of 2015.
Global Insight economist Howard Archer has pencilled in growth of 0.4 per cent and with downside risks to this, given heightened uncertainty over the EU membership referendum adding to business and consumer caution.
Politically, an income tax cut – particularly one with implementation delayed until the autumn – might encourage wavering Tory voters to back David Cameron on the EU vote and help bolster the continuance in office of the “Vote Remain” chancellor after 23 June.
So a tax cut might seem at first like a surprise – but then barely a surprise at all on further consideration… «