Osborne gets £8bn boost ahead of 'growth' Budget

The public finances seem to have recovered faster than expected - but the Chancellor is unlikely to splash the cash on Wednesday...

by James Taylor
Last Updated: 19 Aug 2013
A good start to Budget week for Chancellor George Osborne: the influential Ernst & Young Item Club reckons public sector borrowing for this financial year will come in at 'just' £140.2bn, £8.3bn less than the Office for Budget Responsibility expected. This does mean Osborne won't need to tighten the screw again in Wednesday's Budget, though he's unlikely to fritter away the surplus on a crowd-pleasing sweetener, either. But with most economists in agreement that our current growth forecasts are way too optimistic, the pressure's on Osborne to come up with something substantive. Will reducing red tape and creating a few enterprise zones really cut the mustard?  

The Item Club reckons the public finances will end the year in a better state than forecast thanks to the success of the Government's spending cuts and a rebound in tax revenues. That'll be music to the ears of the Chancellor - partly because it seems to endorse his policy to date, and partly because it spares him the embarrassment of having to cut even deeper in this Budget. In fact, Osborne said unequivocally on the Andrew Marr Show yesterday that there will be no new tax hikes or spending cuts announced on Wednesday.

On the other hand, he’s unlikely to spend that £8bn either, by the sounds of it. Instead, we can expect him to trumpet various business-friendly measures, including confirmation of cuts to corporation tax, reforms of the planning process, the creation of enterprise zones in deprived areas (not that they've ever worked before, but you never know) and, as of today, a scaling back of health and safety requirements. Not before time, we’re sure some of you will argue.

There could also be some interesting developments on tax (if that's not a contradiction in terms). Supposedly, the Government is seriously considering combining income tax and NI; that would certainly be a boon to businesses, though a tough sell politically (if a load of people suddenly discover they're paying more tax than they realised). But it will take ages to sort out – so in the short term the Government is apparently planning to promote the (largely under-used) NI holiday for start-ups.

But while we may have beaten one set of forecasts, it looks likely that we'll miss another: economists reckon the OBR will have to downgrade its 2011 UK growth forecast from 2.1% to 1.8%. And people are feeling the pain; a new study by the Institute for Fiscal Studies estimates that household incomes have fallen by 1.6% since 2008; that’s the biggest drop in living standards for about 30 years, and things may get worse before they get better. Osborne’s going to have a hard time restoring any kind of feelgood factor while that’s happening, no matter how many ‘pro-enterprise’ measures he dreams up between now and Wednesday.

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