Budget 2011: Could Osborne hand out a few goodies today?

Tony Dolphin, ippr senior economist, looks ahead to today's budget - asking whether George Osborne will hand out a few goodies.

The latest figures (pdf), released by the Office for National Statistics (ONS) yesterday, show that public sector net borrowing in February was £11.8 billion (on the accepted basis that excludes the temporary effects of financial interventions). For the first 11 months of the 2010-11 fiscal year, therefore, total borrowing was £123.5 billion, compared to £136.6bn in the same months of 2009-10.

More importantly, if the monthly pattern of 2009-10 is repeated, borrowing in the whole of 2010-11 will be around £141bn, some £8bn below the level expected at the time of last June’s budget and £7.5 billion lower than forecast by the Office for Budget Responsibility (OBR) in November last year. In theory, therefore, the chancellor has room to hand out a few goodies in the budget tomorrow.

However, it is not that simple. The pattern of 2009-10 might not repeat itself. The monthly pattern of the deficit in earlier years points to an outcome much closer to the OBR’s last forecast. Even with 11 months’ data in, there is considerable uncertainty about the outcome for 2010-11 – and in any case, the chancellor’s room for manoeuvre is determined not by what happened in 2010-11, but by what the OBR expects to happen in 2011-12.

Even if it decides to lower its forecast for borrowing in 2010-11, it might take the view that borrowing was lower as a result of one-off factors that will not be sustained into the future. If so, it will probably stick with numbers close to its existing forecasts, in which case the chancellor will have no money for giveaways.

And there is a further complication. The chancellor’s key fiscal target is not for actual public sector borrowing, it is for the cyclically-adjusted deficit on the current budget. When the OBR does its calculations, it might decide that, although the actual deficit was lower than expected in 2010-11, the cyclically-adjusted deficit was in line with previous expectations. If so, again it might see no reason to change its view of the future.

That said, it would be a major surprise if the chancellor did not have a few positive tax and/or spending announcements up his sleeve for the budget.

The most likely candidates appear to be extra funding directed at alleviating the plight of young unemployed people – some of which will be used to create more apprenticeships – and limiting, postponing or abandoning the planned increase in fuel duty.

Both are understandable responses to political pressures. Youth unemployment is at its highest level since 1993 and has become a regular source of negative headlines for the Coalition when the monthly labour market data are released. And higher petrol prices are one of the factors pushing inflation higher (the ONS reported yesterday that it reached 4.4 per cent in February) and squeezing living standards.

In macroeconomic terms, though, any announcements in the budget will be small beer. After tomorrow’s speech, whatever the giveaways, Plan A will still be firmly in place.

The chancellor continues to gamble that the private sector can expand rapidly and create enough jobs to more than offset those that are being lost as a result of public spending cuts.

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