Comment: Chancellor must find wriggle room in Budget

The threshold level at which workers start to pay income tax could rise to 10,800

He may not be able to do much now to secure an overall Conservative majority on 9 May. But he can do much to draw the sting of Labour attacks on “ideological austerity” and the plight of “the squeezed middle”, undermining Labour support in the final weeks of the election campaign. And he can do this while still maintaining firm objectives on deficit reduction and with a raft of measures to support business and enterprise.

This in outline is likely to be the broad thrust of his strategy. Calculations by accountancy giant PwC suggest an improved outlook for government borrowing in the years ahead – a continuing improvement in tax revenues, lower gilt yields and, ironically, lower oil prices which, it says, tend to have a net positive impact on the public finances – could leave him with around £7 billion of “wriggle room”.

That barely signifies in a Budget where total managed public spending is heading towards £750bn. But it’s a welcome transformation from the straitjacket that has characterised the public finances for the past five years.

Lower inflation alone could reduce government spending by around £3.5bn in 2015/16 relative to the December forecast. Other boosts to the public finances will come from lower unemployment benefit payments and higher VAT receipts given stronger household consumption.

Also helping to lower the deficit may be higher GDP growth forecasts. In the December Autumn Statement, the Office for Budget Responsibility (OBR) forecast that GDP growth would be 2.4 per cent in 2015, 2.2 per cent in 2016 and 2.4 per cent in 2017. These projections now look pessimistic. For example, the Bank of England is projecting growth of 2.9 per cent in 2015 and 2016 and 2.6 per cent in 2017.

It is thus also likely that Osborne will unveil a new set of OBR forecasts for public borrowing in the years ahead showing a budget surplus of around £30bn compared with the £23bn projection in the Autumn Statement in December.

Don’t expect that “wriggle room” to result in a pre-election Budget giveaway of that magnitude. But sweeteners there will certainly be.

The chancellor can use the extra discretion he has to meet two objectives: first, to soften the severity of public spending cuts in future years while keeping the projected budget surplus unchanged at the end of the next parliament; and second to encourage business investment, growth and enterprise.

The Autumn Statement projections were based on expenditure consolidation squeezing spending to a new post-Second World War low of 35 per cent of GDP by 2018/19. Even though GDP has multiplied dramatically since then, this provoked cries of outrage from the opposition that we were heading back to war-time austerity. The chancellor could use his newly found fiscal space to soften the implied degree of austerity.

In terms of specific measures, an obvious priority are changes he is expected to announce in North Sea oil taxation. The combination of the oil price slump and high taxes has brought pressure on North Sea operators. Osborne is set to announce a drop in tax rates, perhaps a further cut to the supplementary charge which was already reduced by two per cent in the Autumn Statement to 30 per cent. An investment allowance relief to encourage investment may also be forthcoming in the wake of a consultation announced in January. Accountants BDO believes the new allowance is likely to reduce the effective tax rate to 45-50 per cent for companies investing in the future of the North Sea, in an industry where companies can pay up to 80 per cent in tax.

A likely sweetener in the Budget is a further rise in the threshold level at which workers start to pay income tax, helping to counter the argument that the benefits of the recovery have been confined to the well-off. It is currently planned to raise the tax-free income tax allowance to £10,600 from next month and to £12,000 by 2020. This process could be accelerated by raising the allowance by a further £200 to £10,800 next month.

This, however, could be dwarfed by promises of more significant tax cuts in the years ahead – a well-worn tactic, and one hard to resist with an election less than two months away.

Osborne could also rebuff Labour criticism by announcing a further crackdown on tax avoidance, particularly by multinational companies – potentially in the form of a tax on profits moved to overseas tax havens. He could introduce a new offence of aiding and abetting tax evasion and aggressive tax avoidance. This would be popular with voters, though it may not raise much by way of extra revenue.

Business, of course, is never short of ideas to put before the chancellor ahead of a Budget. This time there is a strong case for a temporary reduction in employers’ National Insurance for the manufacturing sector. The impost acts as a barrier to businesses taking on new workers. Modest reforms so far have had negligible impact.

An attractive option to back the commitment to rebalance the economy and boost exports would be a temporary reduction in employers’ NI for UK businesses that take on new employees involved in manufacturing production processes – targeted at those businesses most likely to be exporters or that supply exporters.

More likely, however, would be an extensive section in the Budget on infrastructure spending in particular Osborne’s involvement in the Northern Cities regional powerhouse plan, which he can present as a potential model for other countries and regions. The sums involved are massive – £15bn in the case of the north of England. But that money has still to be found. And ambitious though he will sound on the extent to which the UK is now on the cusp of a capital spending and infrastructure revolution, this has to go hand-in-hand with firm controls on public expenditure elsewhere.

Overall, however, there is scope here for Osborne to reassure those voters worried about the perceived severity of continuing deficit reduction and to present a softer face while keeping to the Autumn Statement targets for tackling the deficit and debt. «