The UK Government Is About To Reveal Its 2013 Budget - Here Are The Key Issues To Watch
UK watchers widely agree that this budget could help restore or further erode the government's credibility.
Osborne is expected to stick to his plan for austerity (despite the backlash).
He has already asked most departments to cut their budgets by an additional 1 percent in 2013 and 2014, thereby freeing up £2.5 billion for capital spending. In December, he announced cuts of 1 percent in 2013-2014, and 2 percent in 2014-2015, to the budgets of various departments.
Here's a quick round-up of what analysts are looking for:
BNP Paribas - The Focus of the Budget will be monetary not fiscal policy
Paul Mortimer-Lee and David Tinsley, don't expect the Office for Budget Responsibility (OBR) to make huge changes to their forecasts since the Autumn Statement (AS) was issued recently (on December 5).
The current forecast is for 2013 growth of 1.2 percent, this could be lowered to 1 percent. They expect growth of 0.7 percent. It is unlikely that they will make adjustments to forecasts for the following years. The biggest revision will probably be to inflation.
Osborne does however have room to ease, because the end of the forecast period for the AS is 2017/18, and because, for that year, the AS forecast sees "cyclically adjusted current surplus at 0.9% of GDP."
"Because achieving a cyclically adjusted surplus by, say, 0.1% or 0.2% of GDP would be perfectly consistent with meeting the fiscal mandate, the Chancellor could, potentially, announce a discretionary easing of the fiscal stance worth 0.7% of GDP, or around GBP 10bn, and still meet his fiscal mandate.
Whether the Chancellor will decide to pursue such a policy is largely about politics. On the one hand, such a policy could look like an obvious deviation from ‘Plan A’. But on the other, with the political arithmetic stacking up against the parties in the coalition, this Budget may be time to make some selective easing of policy in the hope that some of the ‘feel-good’, or at least ‘feel-better’ factor starts to affect the electorate in time for the 2015 general election."
Other things to watch for:
- Delay in fuel duty hikes as a "gesture to ‘hard-pressed’ households."
- With the focus on monetary policy the budget is likely to review the Bank of England's remit, to give it room to loosen policy despite higher inflation. He can do this by widening the band for inflation.
- "The change that would probably give the MPC the most discretion would be to augment the inflation objective with a growth objective, in other words, to give the Bank of England a ‘dual mandate’ akin to the Federal Reserve’s."
- Gilt sales are expected to be £164 billion in 2013-14 because of disappointing tax revenue.
Societe Generale - George Osborne will have his hands tied
The fact that markets didn't really react to 1. The OBR's prediction that the UK would fail to meet its debt mandate. 2. The Moody's downgrade, has given Osborne the "confidence to allow a little more slippage in the fiscal path," writes Societe Generale's Brian Hilliard.
"The Chancellor is facing criticism from many quarters but his room for maneuver is extremely limited. We expect the OBR, yet again, to lower its growth forecasts and to raise its deficit forecasts. Mr Osborne has already let the debt mandate slip in the 5 December Autumn Statement (AS). This is certain to remain the case in the Budget so a further deterioration in the public finances should not trigger a significant policy reaction in terms of further tightening. Moreover, any tightening that is announced should relate to the years after the election and so will have little effect on the short term growth outlook."
Things to watch for:
- In his speech Osborne is expected to say that the OBR has lowered its growth forecast below 1 percent. Deficit forecasts will likely be increased. "Revisions to the forecasts of the actual deficit path ...will be largely the result of the lower growth forecasts."
- Osborne should add a "little more austerity in 2017-18 but nothing more".
- UK economic policy will likely continue to be: tight fiscal-loose monetary policy.
- A review of the inflation target regime.
David Blanchflower - "Almost everything the government says, do the opposite"
Ahead of the UK Budget, Blanchflower Business Insider that the government should immediately reinstate 20 billion on infrastructure spending, reverse austerity, and cut taxes. "My preferred option would be cut VAT immediately by 5 percent tonight, reduce payroll taxes, and give firms incentives to hire and invest." He said his "default position would be to do the opposite" of what this government is doing.
As the UK teeters on the edge of a triple dip recession, and stands stripped of its AAA rating, people want to see Osborne fired.
A poll by ComRes Ltd. for ITV News, via Bloomberg, showed that 44 percent of voters want him gone, and 54 percent think his budget cuts are unfair. Tomorrow's budget is expected to show that despite such sentiment, Osborne will stick to his austerity plans.