British chancellor George Osborne is expected to be armed with a pre-election war chest of up to £6 billion heading into the UK budget as the outlook for public finances looks set for an upgrade.
Economists say the tumbling oil price, which has dragged down inflation and beefed up prospects for a consumer spending boost to the economy, will help create a rosier fiscal picture for Mr Osborne.
Brent crude had already been sliding from its summertime peak at the time of his autumn statement in December, but has since fallen even further and a barrel is now worth less than half of its value last June. This is expected to be largely responsible for producing a stronger forecast for economic growth and lower borrowing projections from the independent Office for Budget Responsibility (OBR) at the time of the budget. It should give the chancellor more wiggle room when it comes to meeting his plans to reduce the deficit, experts predict.
Giveaway vs austerity
Mr Osborne must decide whether to use the spare cash to fund pre-election giveaways or scale back austerity plans, or alternatively to salt away the windfall to boost his credentials on fiscal discipline.
A report from the EY Item Club – which uses the treasury’s model of the UK economy to run its forecasts – said the chancellor was likely to be presented with a £6 billion windfall, but that political considerations would mean most being banked until after the election.
Lower oil prices have produced a double boost for the chancellor. First, cheaper petrol is seen as likely to boost consumer spending, lifting the wider economy – leading to upgraded growth forecasts and feeding through to Treasury receipts. Second, oil is also largely responsible for another positive impact on government coffers via its impact on inflation and public sector debt.
That is because it has helped Consumer Price Index (CPI) inflation fall to a record low of 0.3 per cent and expectations that it will soon turn negative before remaining at about zero for much of the rest of the year.
Low inflation means lower payments to service index-linked debt and lower increases on certain benefits.
Lower oil prices will have a downward impact on North Sea oil tax receipts, but this is expected to be more than offset by the positive impact on public sector finances from the wider economy.
Meanwhile, revisions to official figures for earlier this year – coupled with bumper self-assessment tax receipts producing a surplus in January – mean 2014/2015 borrowing looks likely to be lower than expected.
According to the EY Item Club, the forecast for borrowing in the current fiscal year ending this month is likely to be revised down to £89 billion.
Growth prediction
Experts at HSBC have pencilled in better growth forecasts, expecting the outlook for gross domestic product growth to rise from 2.4 per cent to 2.7 per cent for this year – and from 2.25 to 2.5 per cent for 2016.
There has been speculation about whether Mr Osborne may be tempted to use the expected budget windfall to ease back on austerity. – (PA)
