Chancellor George Osborne set to claim that his "economic plan for Britain is working," but austerity may last until 2020

By

Hugo Duncan

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George Osborne will next week use his fifth Budget as Chancellor to declare that his economic plan is working and Britain is on the road back to prosperity.

He will say that the biggest risk to the recovery would be changing course and returning to the bad old days under Labour of higher taxes, more borrowing and more spending.

It will be a highly political statement – hardly surprising given the General Election is just 14 months away.

Road to recovery: Behind the rhetoric and promise of a balanced and sustainable recovery the outlook for the public finances will be grim

But behind the rhetoric and promise of a balanced and sustainable recovery the outlook for the public finances will be grim.

The Office for Budget Responsibility will no doubt raise its growth forecasts for the coming years.

The Bank of England now expects output to increase by 3.4 per cent this year, 2.7 per cent in 2015 and 2.8 per cent in 2016 – considerably stronger than the 2.4 per cent, 2.2 per cent and 2.6 per cent predicted by the OBR in the Autumn Statement in December.

But the Government is still on course to borrow around £111billion this year – down from a record of more than £157billion under Labour but still the fifth-biggest annual deficit in British history.

The national debt – already more than tripled from under £400billion a decade ago to over £1.2trillion today – is set to top £1.5trillion in the next three or four years.

Servicing the national debt is the fourth-largest area of expenditure by the Government behind welfare, health and education. 

This year it will cost the UK’s 29.9million taxpayers more than £1,650 each.

The parlous state of the public finances leaves the Chancellor with very little room for pre-election giveaways.

Eye-catching moves such as a 1p cut in the basic rate of income tax – a move the Treasury believes would cost £3.8billion in the first year rising to £4.5billion – remain as far away as ever.

More than 20million workers have benefited from increases in the personal allowance – the amount you can earn before paying tax – but the number of people paying the 40p rate has risen from just over 1.7million 20 years ago to 4.4million today.

More than 5million workers are expected to be in the 40p tax bracket by the time of the next election in 2015 – two million more than at the time of the 2010 election.

‘The higher rate is no longer something faced only by the highly paid few,’ says Paul Johnson, director of the Institute for Fiscal Studies.

Tory MPs are calling on Osborne to ease the burden on the millions who have been or face being sucked into the higher rate of tax.

There may be some help here but anyone expecting a dramatic change of tack is likely to be disappointed.

Economic plans: Osborne plans to say the biggest risk to the recovery would be changing course and returning to the bad old days under Labour

The Chancellor could even be forced to extend austerity to 2020 to plug a £20billion black hole that has opened up due to the structural deficit – the bit which does not automatically disappear with stronger growth – being bigger than expected.

John Hawksworth, chief economist at PricewaterhouseCoopers, said: ‘There is still a long way to go to put the public finances back on a sound footing, and this is likely to imply a relatively cautious approach by the Chancellor in the Budget.

As he made clear in the Autumn Statement, there are still many years of fiscal austerity to come and little room for pre-election giveaways.’

It was, of course, all meant to be so different.

When Osborne delivered his first Budget in June 2010 he was expecting growth of 1.2 per cent in 2010, 2.3 per cent in 2011, 2.8 per cent in 2012 and 2.9 per cent in 2013.

Instead he got growth of 1.7 per cent in 2010 followed by 1.1 per cent in 2011, 0.3 per cent in 2012 and 1.8 per cent in 2013.

It means that borrowing this year will be nearly twice the £60billion expected and the national debt will be around 75 per cent of national income and rising, rather than around 70 per cent and falling.

Andrew Smith, chief economist at KPMG, said: ‘The Government’s original strategy was to combine economic recovery with repair of the public finances within the current five-year Parliament.

The good news is that we are finally getting the recovery; the bad news is that we are only halfway through what has now become a decade-long deficit reduction programme, severely limiting the Chancellor’s room for manoeuvre in this year’s Budget.’

The Budget will be the most upbeat for years with record numbers of people in work, inflation back below the 2 per cent target, and the economy on the verge of returning to its pre-recession peak.

But, as the Chancellor himself will say, the crucial job of restoring the public finances to health is far from over.

Comments (3)

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Mr Slightly Annoyed,

Little England, United Kingdom,

49 minutes ago

We (Labour) borrowed a fortune and spent it buying votes. Now we have to pay it back.

Assume The Position,

So the Tories can Kill You, United Kingdom,

2 hours ago

So he’s cut our pensions by 20%, the jobs on the internet pay 10K less than they did 5 years ago, our children’s university educations cost more than 10K a year, FFL and HTB have stimulated a low deposit house price apocalypse, real-world inflation has reduced our spending power by about 20%, savers have lost 325 billion in interest, “so far,” to pay for his 375 billion quantitative easing crime against the future, I’ve personally lost over 40K in interest payments, and his economic policies are further undermining job security as lower wage competition increasingly threatens us all ……………………… but his plan is working? Brown was a disaster, which is why we elected the Tories to put an end to his economic mania of making house prices the economy. Britain’s recovery is 100% borrowed on the back of living standards crippling mortgage debt. It’s the slowest and least real of any of our major competitors. Why wait till 2015 for the election, I want to vote Osborne out now.

hari BABU60,

HARROW, United Kingdom,

3 hours ago

If only and only if they had not claimed for the duck house and things ! and filled ones own pockets , without any damn shame !

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Chancellor George Osborne set to claim that his "economic plan for Britain is working," but austerity may last until 2020