Budget preview: Don’t expect pyrotechnics

March 17, 2014

–Nick Beecroft is Chairman, Saxo Capital Markets, Saxo Bank. The opinions expressed are his own.–

Those expecting a rivetingly exciting spectacle when the chancellor announces his budget next Wednesday will be in for disappointment, but that doesn’t mean that this won’t be an intensely political budget, given this really represents his last chance to make changes which will be fully appreciated by the electorate by the next general election. Having said this, his room for manoeuvre is limited, and the effect on the overall fiscal balance will be minimal.

In tandem with the budget, we will also get official fiscal and economic projections from the Office for Budget Responsibility (OBR), and I don’t expect much change from December’s projections. Whilst the OBR may raise its growth forecasts a little, the fiscal projections will be little changed from December’s autumn statement. The 2013/14 deficit looks like it will be £95bn, vs the OBR December 2013 forecast of £99bn.

Despite the extraordinarily rapid improvement in growth and sentiment which we have witnessed over the last six months, the deficit will still be over 4% in 2015/16 – still larger than Italy, Greece and Portugal, and only being exceeded by Spain. Our debt-to-GDP ratio will still be 80%.

Given this backdrop, we should expect headline grabbing and vote-winning moves, but no significant change in net fiscal stance. As the chancellor said in the autumn statement: “If we give up on the plan now, we’d be saddled with a deficit that is among the highest in Europe”.

Likely measures-

With the election uppermost in his mind, the chancellor would be delighted to see the headlines next Thursday morning dominated by his announcement that he was raising the Personal Allowance to £10,500, (from the current £10,000), in a nod to the Liberal Democrats desire to help the lowest paid (the quid pro quo being help for the squeezed middle-England Tory voter). The FT reports that this demographic will now very probably be higher rate tax payers, and as a whole paying more tax than basic rate payers for first time this year. He may possibly also tackle the ridiculous situation whereby those earning between £100k and £120k pay a marginal rate of 62% including national insurance contributions (NIC).

In an effort to achieve a re-balance of the economy by incentivising investment and exports, we may see tax breaks in these areas. For instance, the CBI has pushed for an extension in the Annual Investment Allowance for smaller firms and incentives for longer-term equity investment. Only last month the chancellor said: “Britain is not investing enough […] Britain is not exporting enough”.

Whilst he will not tinker with the vote-winning Help to Buy schemes he may, in the interests of balance and housing market prudence, announce measures to support house-building aimed at affordable housing.

He may raise the threshold at which employers have to pay NIC’s, in order to encourage more work for part-timers.

In terms of green measures, expect more help for installation of solar panels, wind turbines, water turbines, ground-source heat pumps, etc.

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