The Budget that George Osborne will present to Parliament tomorrow is, in effect, the Coalition’s last. Next year’s financial statement, less than two months before the May general election, will be a purely political affair. After five years of compromise, the Chancellor will use the occasion to present voters with an unashamedly Tory vision (contingent on a majority win at the ballot box, of course), hung with as many baubles as he can muster. This year, however, the Chancellor has neither the means nor the freedom to deviate from the current course.
The good news is the economy is assuredly on the up. The 2013 Budget was delivered amid warnings of an impending slide back into recession. Since then, we have had four consecutive quarters of expansion and, by the end of 2014, GDP is expected – finally – to recover to pre-crash levels. That said, it is too soon to be sure of consistent growth to come and too soon for the parlous public finances to be seeing much benefit. Indeed, with a deficit still running at more than £100bn, Mr Osborne cannot present plans tomorrow that are anything but scrupulously fiscally neutral without facing charges of hypocrisy, if not recklessness. Yet this limited room for manoeuvre comes with a political upside. The Chancellor can stick with his familiar refrain about the plan working but there being a long way to go – for which, read: we are fixing things, but it is not yet safe to let the other lot in.
Politically, Mr Osborne has little more wriggle room. While he has tried to blank the Opposition rhetoric about a “cost of living crisis”, the fact remains that swathes of the electorate have seen their spending power at best stagnate since 2007. Nor is the pressure all from the left. Recent weeks have seen perennial Tory support for tax cuts become public demands for the threshold of the 40p band to be raised to take the pressure off the squeezed middle classes.
The Chancellor – rightly – judged that, against a backdrop of continuing austerity, the prospect of a tax cut at the upper end would be politically impossible. Instead, then, tomorrow’s Budget will pledge to raise the personal allowance to £10,500, a move – albeit one for which the Liberal Democrats can claim most of the credit – Mr Osborne hopes will undermine Labour claims that the Tories are the party of the rich.
Tweaks to taxes and twitches to duties on, say, beer may draw the most attention, along with eye-catching, if pre-announced, plans for a new garden city and an extension of the Help to Buy scheme. But it is elsewhere that Mr Osborne’s central challenge lies. His position may be as constrained as it has ever been, but this Budget is also his last chance to have an impact before an election at which his party needs a positive economic story even more than most. And for all the rosier outlook, the character of recent improvements is far from certain.
Despite much talk of rebalancing, the engine of growth remains domestic demand, itself reliant on a roaring housing market. Exports are disappointing, investment levels are up but are still weaker than hoped, and the “productivity conundrum” foxing economists studying Britain’s statistics suggests that capacity for future growth may be limited. As such, there will be few fireworks from Mr Osborne tomorrow, but it could still be his most decisive Budget yet.