Rising inflation and the prospect of higher interest rates rule out chance of any giveaway

AS THE old saying goes: “I wouldn’t start from here if I were you.” While that joke probably didn’t cross George Osborne’s mind yesterday as he put the finishing touches to today’s budget, it certainly occurred to the rest of us.

Less than 24 hours before standing up in a packed House of Commons, the chancellor of the exchequer was hit with a double dose of bad news – spiralling inflation and the worst February public borrowing figures on record. Rounding off a dismal day for the UK economy, Bank of England rate-setter Andrew Sentance warned that UK inflation – already the worst in western Europe – could easily climb above 5 per cent in the coming months.

Any lingering hopes that there might be scope for some sort of giveaway in the budget evaporated and now economists are placing bets on interest rates to rise in May or even April.

Sentance has long argued for rates to rise and in a speech to the CBI yesterday, expressed his fears that if the Bank of England delays much longer, it will be forced into “destabilising” rate hikes to tackle the surging cost of living.

Figures from the Office for National Statistics showed consumer price inflation, fuelled by higher heating costs and more expensive clothing and footwear, leapt to 4.4 per cent in February. This is more than double the government’s target rate of 2 per cent and well ahead of City forecasts.

The wider Retail Prices Index, which includes mortgage payments, rose from 5.1 per cent to 5.5 per cent – its highest level in 20 years.

The public finances too were far worse than economists had feared, with public sector borrowing reaching £11.8 billion – a record for February – and taking the total for the financial year so far to £123.5 billion against £136.6 billion this time last year.

While the government remains on course to meet the annual target of £148.5 billion set by the independent office for budget responsibility, previous hopes of undershooting the target by as much as £10 billion have faded.

It all makes for a dismal backdrop to Osborne’s second budget as the coalition pursues its swingeing, debt-reducing, austerity programme.

We will hear of reduced growth targets for the economy, with the 2.1 per cent GDP rise expected in 2011 cut to around 1.5 per cent and from 2.6 per cent to around 1.8 per cent the following year.

Osborne may float the idea of merging income tax with national insurance, although the complexities involved mean such a move would be several years off.

Tax avoidance will once again be a central theme and Osborne will be hoping for some favourable headlines with a tax on private planes used by the super-rich, already dubbed the “Lear jet levy.”

There will be a few crumbs of good news for the rest of us – a 5 pence a litre rise in fuel duty is likely to be abandoned and it is widely expected that the planned rise in air passenger duty will be scrapped, saving travellers £140 million a year.

Half a million or so lower-paid will fall out of the tax bracket as the threshold is raised but some 700,000 better paid – the “squeezed middle” – will get an unwelcome promotion to the higher-rate tax bracket as that threshold is lowered.

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The retro look is back in style at New Look, the struggling discount fashion retailer which was once valued at almost £2 billion.

More than 40 years after he founded the business, Tom Singh is resuming day-to-day control of the 1,000-shop chain after the abrupt departure of chief executive Carl McPhail and chairman John Gildersleeve. Their resignations are thought to have been forced by New Look’s private equity shareholders, Apax and Permira, which together control more than 50 per cent of the shares.

The return of Singh, who owns around 23 per cent of the company, comes in the wake of its embarrassing failure to float on the stock market last year, followed by a slump in sales in recent months.

Once the hottest name on the high street, New Look has been eclipsed by rivals like Primark and also admitted to shooting itself in the foot by bringing in ranges that were too young for its target market.

A disruptive head office move from Weymouth to London last year didn’t help, with many key staff refusing to relocate.

Singh is taking back control only temporarily; aged 62, he is said to have no desire to spend the rest of his career running the company he founded in 1969.

Fiona Walsh writes for the Guardiannewspaper in London