Budget 2014: What will be in George Osborne’s fifth Budget?

Despite the economic recovery the Chancellor still has little fiscal room for manoeuvre

When George Osborne unveiled his “emergency” Budget in June 2010 he expected the economy today to be in a very different place. At that time Mr Osborne brandished forecasts showing the deficit falling to 3.5 per cent of GDP, or £60bn in 2013/14. In fact, state borrowing this year will be almost double that. Back in 2010 Mr Osborne expected the national debt to peak this year at 70 per cent of annual national output. Instead it has reached 75 per cent of GDP and is still rising.

The difference, of course, is a consequence of much weaker than expected growth. The recovery has finally arrived, with the economy growing at a year-on-year rate of 2.7 per cent in the final quarter of last year. But will it be enough for Mr Osborne?

In 2010, the assumption in Conservative circles was that at this stage in the political cycle the Chancellor would be in a position to offer pre-election tax cuts. Yet the opportunity for giveaways is limited thanks to the disappointing growth.

Budget 2014 LIVE

Nevertheless, analysts say this is the Chancellor’s final chance to influence the economy in a meaningful way before next year’s general election. If he wants to pull any levers, it’s now or never. So what can we reasonably expect tomorrow when Mr Osborne rises at the Dispatch Box?

Growth and borrowing forecasts

The official forecaster, the Office for Budget Responsibility (OBR), is likely to lift its near-term growth forecasts a little on its December estimates. But it may well revise down its estimate of the economy’s so-called “output gap”, which refers to the ability of the economy to grow rapidly without generating inflation. In December the OBR put the output gap at 1.8 per cent of GDP in 2014. A downward revision would probably prompt the OBR to revise up its estimate of the structural deficit, the part that does not disappear when the economy is growing at normal speed. This, in turn, would require the Chancellor to commit to more austerity in future years to keep deficit reduction at the same pace as previously. However, as departmental spending limits have been set only up to the end of 2015/16 these cuts are entirely hypothetical. The question of where they fall would only be decided in the next Parliament.

Housing

The Chancellor has already said that the first part of his Help to Buy scheme, which offers state equity loans for first-time buyers who acquire newly built homes, will be extended for a further four years. It was originally due to expire in 2016, but will now continue until 2020. The Treasury estimates that this will prompt the construction of 120,000 new homes (although this is a drop in the ocean when annual demand for new housing is estimated to be about 250,000). The Chancellor has also announced a helping hand for the creation of “garden cities”, with £200m expected to be earmarked to help build one such community in Ebbsfleet, Kent. The average home now costs £250,000, which is exactly where 1 per cent stamp duty kicks in. Some expect that threshold to be lifted.

Tax

The tax-free personal income tax allowance is expected to be lifted once again to £10,500. Another fuel duty freeze to benefit motorists is likely. To help bring down youth joblessness the Coalition committed in December to get rid of employers’ national insurance for under-21s in 2015. That could be brought forward to the 2014/15 tax year. The number of people paying the 40 per cent tax rate, which kicks in on incomes above £41,450, has grown by 1.4 million to 4.4 million since 2010. There has been much pressure on the Chancellor to raise the threshold for the higher rate levy as a result. But this would be costly to the Exchequer and, given the still fragile state of the public finances, is unlikely.

Businesses

The rebalancing of the economy that the Coalition envisioned five years ago has not materialised. The recovery has been largely driven so far by consumer spending. To help accelerate the rebalancing it’s possible Mr Osborne will increase firms’ investment allowances to encourage them to spend their cash surpluses. The CBI lobby group has recommended extending the Annual Investment Allowance for small firms along with other inducements to longer-term equity investment. A reconfiguration of business rates is possible, but less likely. There could be some help for exporters too, enhanced funding for UK Trade and Investment. Many expect another assault on corporate tax avoidance by way of compensation.

Households

Average real wages are finally expected to turn positive this year, mainly thanks to falling inflation. But many families’ finances remain under pressure and the Chancellor could announce additional state help to meet childcare costs. There is also talk of a freeze in the carbon price floor that he introduced in 2011. That would keep down household and business energy bills, although it would also remove an incentive for energy firms to invest in renewables.

The overall Budget is almost certain to be fiscally neutral, enabling the Chancellor to remain within the tax and spending envelope he has already outlined. That means that any tax cuts and spending increases are likely to be relatively small and offset by spending cuts in other government departments.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'