Amid all the rest of the news sweeping the world, it seems almost parochial to focus on the biggest event in the British financial calendar this week – the Budget.
But the mundane reality is that while geopolitical events matter, most British people’s finances are much more likely to be affected by what George Osborne does, than by events in Libya.
The bad news is that the government finances look even wobblier than expected, which suggests that Osborne won’t have much room for any giveaways.
The good news is that perhaps that’ll encourage some long-term thinking instead of the usual voter-bribing short-term fiddling
The government finances look even tighter than expected
Whatever else the Budget contains, an easier life for the average consumer is not going to be high on the list. George Osborne probably won’t raise fuel duty. But all this means is that petrol won’t become 5p more expensive overnight. It’s hardly a ‘sweetener’. And he probably won’t raise air passenger duty on commercial flights any further. But he will extend it to private jets, which only seems fair.
But even if he wanted to hand out freebies, he couldn’t. The government finances are looking tighter than expected. Monthly public borrowing came in higher than forecast in February, at £11.8bn, rather than the £7bn predicted. Borrowing for the year is still likely to undershoot original forecasts, but not by as much as Osborne may have hoped. Why? The Financial Times blames inflation. (Which, as National Statistics reports this morning, shot up to 4.4% in February.)
In short, when inflation rises, so does the cost of providing various benefits. That’s not always a problem, because normally rising inflation also means rising wages, and therefore a rising tax take. But at the moment, wages aren’t rising in line with inflation. So the government has to spend more, but it doesn’t get the tax income to match.
The Treasury has said there won’t be any need to raise taxes or cut spending any further than it already has. And as Allister Heath points out in City AM, higher inflation also has the side effect of making the existing plans for cuts more severe in real, inflation-adjusted terms.
But it does suggest that Osborne doesn’t have a lot of room for manoeuvre. So it’s unlikely that there will be any major surprises.
In terms of individual sectors, one area that might be worth keeping an eye on is defence. I was watching the BBC Parliament channel yesterday and a clear concern of MPs was where the money is going to come from to fund the Libyan campaign. So it’s possible that Osborne might find a few pennies to boost spending on this front. But I can’t see any unexpected bonuses for any other sector.
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Why you should hope for a boring Budget
But that’s not such a bad thing. A Budget without lots of tinkering is exactly what we need. And with the next election still some distance away, Osborne can afford to be unpopular.
In the longer run, the best thing that Osborne can do for investors is to show that he takes the proposals from the Office of Tax Simplification seriously – such as the recommendation to merge National Insurance and income tax, for example. The whole debate over the government’s role in the economy has been hijacked by the argument over whether to cut now or cut later. But there are far more important things for the government to do beyond taking money from one group and giving it to another.
Under Gordon Brown and to a lesser extent, Alistair Darling, the sense after every Budget was that we’d been robbed. We just wouldn’t find out exactly how until we’d pored over the small print for a few weeks. The process of making tax law became unpredictable. As a result, planning ahead became increasingly hard.
When individuals and businesses feel that a country’s tax environment is becoming hostile and unpredictable, that’s bad for confidence. I’m not talking about bankers throwing hissy fits and threatening to migrate to Switzerland or some other godforsaken tax haven.
I’m talking about ordinary people being hopelessly confused when they come to fill in their tax returns. Or trying to make plans for their future, or their heirs, and having to cope with constantly changing rules. When you keep complicating a system, you lose more and more money through fraud, error and waste, which is bad enough. But it also acts as a disincentive to trying to get ahead.
So the most important thing Osborne can do on Wednesday is to draw a line under our current messy system, and make it clear that the only changes he plans to make will be to simplify it. I don’t like the idea of higher taxes, but people can cope with them if they are predictable, and can plan ahead for them.
We’ll be reporting the highlights (and lowlights) from the Budget on the website tomorrow.
A note for traders
And if you’re interested in trading, the best bet is to look out for the impact on sterling. Truth be told, I can’t see any big moves happening. But given Osborne’s stance on austerity, the market won’t be expecting too many giveaways. If it looks as though he’s being even a little more free with the cash than anyone had thought (perhaps in the defence arena), the pound could weaken.
Also, you should sign up for our free MoneyWeek Trader email, where veteran spread better John Burford shares his tips and tactics for maximising your profits and minimising your losses.
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