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OBR to revise growth upwards

Item Club expects cautious Chancellor to bank £6bn war chest

MoneyThe Chancellor will see his Budget war chest swelled by higher growth figures and lower borrowing projections, but he is likely to bank most of the expected £6 billion windfall, according to a new forecast.

EY’s Item Club believes George Osborne will resist the opportunities of improving public finances to embark on a spending spree.

It says political constraints will mean that most of the additional money at his disposal is likely to be banked until after the election, rather than delivered as pre-election giveaways in the Budget.

Its latest report says that the positive impact of falling oil prices on the UK’s economy will be felt this year through lower inflation, which is boosting consumer spending and strengthening GDP. This should allow the Office for Budget Responsibility to upgrade its GDP forecasts for 2015 from 2.4% to closer to 3%.

“The Chancellor’s arm will also be strengthened by stronger tax revenues, particularly through VAT receipts as UK consumers make use of their spending power. As a result, the EY Item Club expects the OBR to revise down its forecast for borrowing in 2014-15 from £91.3bn to £89bn,” it says.

“And the Chancellor is likely to receive even better news for next year. Lower inflation, partly a consequence of the lower oil price, and the recent downward shift in the forward curve for gilts both point to lower spending on debt interest payments. As a result, the EY Item Club expects the OBR to revise down its forecast for borrowing in 2015/16 by £6bn.

Martin Beck, senior economic adviser to the EY Item Club, said: “The OBR’s forecast will provide plenty of cheer for the Chancellor, who will be able to trumpet downgrades to borrowing projections and upgrades to the forecast for economic growth.

“A big part of this story is the collapse in the oil price, which has boosted the outlook for growth and, by reducing inflation, helped to reduce some of the government’s spending commitments.

“In a world without political complications, the Chancellor would be expected to take advantage of his fiscal wiggle room and announce some eye catching measures as he delivers his last Budget in this Parliament.

“However, political constraints mean that we can expect a caretaker Budget that keeps things ticking over, with most of the expected windfall banked until after the general election, when any big policy decisions will be made.”

Paul Gallagher, EY’s Scotland Tax Partner, added: “The election is just 50 days away from the day of the Budget, but despite current political sensitivities we should still expect to see the announcement of a few targeted measures. For example, we can expect some relief for the North Sea industry in the form of lower corporation tax for those companies investing in the UK.

“The Chancellor may also choose to press ahead with a further increase in the tax free personal allowance or use the Budget to provide details around the reform of business rates.”

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