MacroScope

Osborne stakes out election ground with little fiscal leeway

By Mike Peacock
March 19, 2014

The annual UK budget is always a big set piece but it’s hard to remember one where there have been fewer advance leaks – indicative of a steady-as-she-goes approach by George Osborne.
Having put so much political capital into reducing the deficit, to switch now at a time when the economy is recovering strongly would be politically risky. And with debt falling only slowly there is little fiscal leeway.

That’s not to say this isn’t a big political moment. Yes there is the finance minister’s autumn statement and another budget before May 2015 elections but this is the moment when the narrative for the economy and Britons’ wellbeing is staked out.

So expect a further increase in the threshold at which income tax starts to be paid, to help the poorer, and measures to boost business investment in an attempt to rebalance the economy.
Osborne will also extend his “help to buy” housing scheme, questionable at a time when property prices are rising strongly. On the thrift front, he will announce details of a ceiling on welfare spending.

Already, the Treasury has released figures showing most workers have seen their pay rise by more than inflation in recent years, an early riposte to the opposition Labour party’s claims that while the economy may now be growing strongly most of the country doesn’t feel it because living standards are falling. Labour is ahead in the opinion polls but its lead is what pollsters call “soft”.

Osborne is also likely to herald the point at which the UK economy gets back to the size it was before the financial crisis. That could happen in this quarter or the next but it’s taken an awful long time to get there. And of course there will be plenty of blame heaped on the previous Labour government for failing to avert a financial crisis that engulfed the whole world.

The independent Office for Budget Responsibility will produce fresh GDP and debt forecasts. In December it forecast growth of 2.4 percent this year, which could be revised upwards. Before Osborne stands up in parliament, we get minutes from the Bank of England’s last policy meeting and latest unemployment data.

The Ukrainian government is meeting. Expect more condemnation of Vladimir Putin’s intervention in Crimea which took an alarming turn late yesterday when a Ukrainian serviceman was killed in an attack on a base in the main town of Simferopol. It shows how easily hostilities could be triggered. Kiev responded by authorizing its soldiers in Crimea to use weapons to protect themselves, reversing a previous order.

In Brussels, EU economics chief Olli Rehn will make a statement on financial assistance to Kiev and the European Parliament’s trade committee will debate the EU’s offer to give nearly 500 million euros worth of trade benefits to Ukraine, with a vote on Thursday.

The markets, which will be fixated by the Federal Reserve today, took heart yesterday from Putin’s declaration that he would not seek any further division of Ukraine. Russian lawmakers scoffed at the paucity of western sanctions and Washington and the EU says tougher measures could follow. However, to hit where it really hurts – with financial and trade sanctions – looks very difficult for Europe with so many vested interests and links with Russia from Germany and Britain to Finland and Cyprus and many others besides.

Reports in Moscow that European Council President Herman Van Rompuy would pay a visit were firmly denied in Brussels

Iran and six world powers – the United States, France, Germany, Britain, China and Russia – will try to make headway toward resolving their nuclear dispute in Vienna, with Western officials hoping the uphill challenge will not be made even more difficult by the Ukraine crisis. This is the second such meeting since talks on a final settlement of the dispute began in February, and is expected to be followed by several more in the months ahead. The aim is to reach a long-term accord by late July.

Dutch local elections are likely to hand a drubbing to the two governing parties that could strain the coalition and prompt calls to loosen the purse strings. In a sign of how much of a toll the economy has taken on the governing Liberal and Labour parties, the latter is likely to lose its position as largest party on Amsterdam’s city council, which it has held for 60 years.

South Africa’s anti-corruption watchdog will report on $21 million worth of state funds used to upgrade President Jacob Zuma’s homestead. The report is expected to be critical and will be damaging ahead of May 7 elections, which the ruling ANC still expects to win despite growing disillusionment. Compounding the ANC’s political troubles, the country’ largest union, National Union of Metalworkers of South Africa, which has said it will not support the ANC in the election, holds a one-day strike. After a five-week rally, the rand could be vulnerable.

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