Osborne was given a unexpected boost in November when the government’s fiscal watchdog, the Office for Budget Responsibility (OBR), gave him an extra £27bn over the current parliament. His luck will reverse in the coming budget, with the Centre for Economics and Business Research estimating Osborne could have £45bn less to spend due to a “deterioration in the world economy”.
The OBR is widely expected to lower both its growth and inflation forecasts. Together these reduce nominal GDP growth, which is bad news for tax receipts.
“Slower growth and lower inflation typically point to weaker tax receipts and higher government spending. Furthermore, the debt to GDP and budget deficit as a percentage of GDP calculations suffer since the denominator is smaller,” said Alan Clarke from Scotiabank.
Yet some boosts are expected. A big slice of the government’s debt interest is linked to inflation while the interest it pays on its regular debt hit a record low recently.
“There is likely to be a windfall for the Chancellor from lower inflation and government bond yields. However, at best, it will merely offset the deterioration in the public finances from the downgrade in the nominal GDP projections,” Clarke said.
“Not only has deficit reduction been slower than anticipated in recent months, but the OBR is likely to downgrade its economic forecasts,” economists at Capital Economics said.
“The impact of the drop in market interest rates on projected debt interest payments might save the Chancellor’s bacon. If not, Mr Osborne faces a choice between breaking his fiscal rules and announcing more austerity at a time when the economic recovery is already looking shaky.”