Budget 2015: Osborne has £6bn war chest

Chancellor has more wiggle room when it comes to meeting plans to reduce deficit

Updated: 
Budget 2014

Chancellor George Osborne is expected to be armed with a pre-election war chest of up to £6 billion heading into the Budget as the outlook for UK 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. A barrel is now worth less than half of its value last June.

This fall 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.

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 in order to boost his credentials on fiscal discipline.

A report from the EY ITEM Club said the Chancellor was likely to be presented with a £6 billion windfall, but that political considerations would mean most of this being banked until after the election.

Lower oil prices have produced a double boost for the Chancellor.

Firstly, cheaper petrol is seen as likely to boost consumer spending, lifting the wider economy - leading to upgraded growth forecasts in today's Budget - and feeding through to Treasury receipts.

Secondly, oil is also largely responsible for another positive impact on the Government's coffers via its impact on inflation and therefore public sector debt.

That is because it has helped the Consumer Price Index (CPI) inflation fall to a record low of 0.3% and expectations that it will soon turn negative before remaining at around zero for much of the rest of the year.

Low inflation means lower payments by the Government to service index-linked debt. It also means 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 2014/15 borrowing looks likely to come in lower than expected.

The OBR predicted in December that the underlying deficit would fall from £97.5 billion in 2013/14 to £91.3 billion in the current fiscal year.

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.

Experts at HSBC expect a figure of £90.6 billion, while they also see the OBR cutting its prediction for 2015/16's deficit from £75.9 billion to £73.4 billion.

Meanwhile, they have pencilled in better growth forecasts, expecting the outlook for gross domestic product (GDP) growth to rise from 2.4% to 2.7% for this year - and from 2.25 to 2.5% for 2016.

There has been speculation about whether Mr Osborne may be tempted to use the expected Budget windfall to ease back on austerity measures, especially after the political controversy in the wake of the Autumn Statement.

At that time, the OBR calculated that the fiscal plans he has pencilled in over the next few years - with a budget surplus of £23.1 billion pencilled in for 2018/19 - would see the rate of spending as a portion of GDP fall to its lowest since the 1930s.

Experts at consultancy Capital Economics said: "Of course, the Chancellor won't want to throw away his hard-won reputation for fiscal responsibility. Nonetheless, he could scale back the planned spending cuts a bit.

"Although this would make barely a dent in their total size, it could counter criticism that he is cutting just on ideological grounds.

"And with the election just seven weeks after the Budget, he surely won't be able to resist the temptation to hand out a few billion in pre-election."

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