What we can expect from Osborne in next week’s Budget

The upcoming EU referendum has largely overshadowed the Budget in terms of media coverage in recent weeks.

One issue that has been generating headlines is policy on pension tax relief. After a lengthy and wide-ranging consultation, the Government has ruled out any changes – in this Budget at least – amid reports of a Conservative backlash.

By discounting that reform, George Osborne has restricted his options for raising the tax base. Instead, the Chancellor paved the way for another austerity Budget when, in February, he said he “may need to undertake further reductions” to public spending in light of the “dangerous cocktail” of risks to Britain’s prospects.

The stakes are high for Osborne. He has gambled a huge amount of political capital on achieving a public finance surplus by the end of the decade – a surplus that is very vulnerable to changing forecasts. In November’s Autumn Statement, he received a windfall worth about £27bn over the parliament from Office for Budget Responsibility (OBR) projections, comprising higher tax receipts from VAT, income tax and corporation tax and lower debt interest payments. In the same statement, he spent that money on, among other things, scrapping cuts to tax credits and protecting police funding. That left him with a projected surplus of £10.1bn by 2019/20.

Some of the economic indicators since the last update suggest that target could be in jeopardy. The Institute for Fiscal Studies said if the Bank of England’s downgraded earnings growth projections were mirrored by the OBR, £5bn would be wiped off the 2020 surplus. One key number to look out for is £73.5bn, projected borrowing for 2015/16.

These forecasts are based on the assumption that Osborne will break the habit of a chancellorship and impose the first increase in fuel duty since 2010. With prices at the petrol pump low due to the fall in the oil price, many believe it is as good a chance as he will get to increase the tax – but it is a move that will trigger a backlash from ‘blue-collar’ Tories.

Osborne’s challenge is to create a narrative that does not focus on ‘surplus target in jeopardy’ (‘surplus target on track’ is a tricky sell to a front page editor) or on having to explain why he is making cuts now that he did not announce at the time of the spending review. Look out for accelerated tax cuts through rises in the personal allowance, the potential sale of more assets like Lloyds shares and possibly Channel 4, and trumpeting of the ‘Northern Powerhouse’ and ‘Midlands Engine’.

As ever, the policies, projections and Osborne’s own performance will play into analyses of a future Conservative leadership contest.

The Dods Monitoring team have compiled a speculation and insight briefing on measures the Chancellor may announce on Wednesday.  Get a free copy here