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Osborne ponders Budget giveaway


Falling oil prices have boosted Treasury coffers as Chancellor George Osborne prepares for Wednesday's Budget

Falling oil prices have boosted Treasury coffers as Chancellor George Osborne prepares for Wednesday's Budget

Falling oil prices have boosted Treasury coffers as Chancellor George Osborne prepares for Wednesday's Budget

George Osborne will head into this week's Budget with a £5 billion pre-election war chest as tumbling oil prices help lower inflation and beef up the UK's growth outlook, economists predict.

The slide in oil - with a barrel of Brent crude today worth half as much as it was last summer - is largely responsible for the fiscal picture facing the Chancellor being better than expected at the time of his Autumn Statement in December.

Now 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.

Simon Wells, chief UK economist at HSBC, said: "Mr Osborne will be looking for vote-winning headlines.

"He stuck with a policy of fiscal austerity through the tough times of 2012 and early 2013. So he will not abandon austerity now that the economy is recovering, but with a general election on 7 May there is some scope for modest giveaways."

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 Wednesday'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 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.

Mr Wells predicts that lower inflation alone could reduce spending in the fiscal year from the start of April by £3.5 billion relative the latest December forecast by the independent Office for Budget Responsibility (OBR).

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.

But HSBC expects this to be lower at £90.6 billion. They also see the OBR cutting its prediction for 2015/16's deficit from £75.9 billion to £73.4 billion.

They also predict official forecasts for growth will be upgraded from 2.4% to 2.7% for this year and from 2.2% to 2.5% for 2016.

Experts at consultancy Capital Economics said: "The recent downward revisions to borrowing, the drop in inflation (and inflation-linked debt payments) and a better growth outlook should free up around £5 billion for Mr Osborne to spend."

There may be a temptation to ease back on austerity after the OBR in December calculated that the fiscal plans he has pencilled in over the next few years would see the rate of spending as a portion of gross domestic product fall to its lowest since the 1930s.

"Of course, the Chancellor won't want to throw away his hard-won reputation for fiscal responsibility," Capital Economics said. "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 sweeteners."