Connect Intelligence’s Budget 2014 briefing looks at the tough decisions that the Chancellor of the Exchequer has to make ahead of the statement that will be one of the last chances to deliver significant economic reform ahead of the next election.
This year’s Budget is the last opportunity for the Chancellor, George Osborne, to attempt to deliver significant changes designed to have a positive impact on the electorate before the 2015 general election.
The big challenge for the Chancellor will be to present popular giveaways which might be popular ahead of the election whilst holding firm on his core messages that the economic recovery is fragile.
He will try to keep in check any exuberance about the good times being here again and seek to keep his grip on austerity. This theme will be supported by the expected grim analysis from the Office of Budget Responsibility (OBR) which is most likely to say that the recession has permanently damaged the UK’s economic capacity which will have the effect of dampening the rate of growth revenue coming into the Treasury and therefore the speed of deficit reduction.
The Chancellor reflected some of this gloom when he set out his priorities for the Budget in a recent speech in Hong Kong where he said: “This is not a Budget where we can rest on our laurels and say ‘job done’”. He also spoke about the need for the UK to confront some “hard truths” including our performance on exports and delivering investment to improve the UK’s productivity.
The Budget is therefore likely to focus on measures to help UK business and rebalance the economy with extra help to support exporters, moves to hold back the growing burden of energy prices on business and to encourage investment in skills.
Electorally popular giveaways are likely to be restricted to the expected increase in personal allowances to £10,500.
The political potency of the increase in personal allowances is underlined by the efforts made by both coalition parties to claim credit for it. To avoid the Liberal Democrats jumping the gun with pre-budget leaks as happened last year, the Chancellor’s team have gone further and heavily pre-briefed the move with the intention of having it seen as a move that Conservatives have championed before pre-Budget speculation started in earnest.
This pre-emptive move has raised concerns that the political capital to be gained from increases in the personal allowance will be diluted as the debate has been moved on to the 40p higher rate. There is an increasing number of Conservatives who are suggesting that more focus should be placed on preventing fiscal drag drawing more and more middle earners into this 40p rate. Significant efforts will therefore be made by team Osborne to show how the increase in the personal allowance helps the ‘squeezed middle’ as well as the lower paid.
The Chancellor is the Conservative Party’s chief political strategist and every decision he makes in the Budget will be carefully calculated to try and draw dividing lines and restrict room for movement for Labour.
Labour’s response is bound to focus on the ‘cost of living’, which is a theme which has proved popular with the public. It is likely that the Government will encroach on Labour territory by claiming that measures such as changes to the personal allowance and an expected further freeze in fuel duty show that they understand the pressures faced by ‘hard working families’.
Ed Miliband faces a dilemma in his response to the Budget statement. He will be keen to highlight a gloomy picture on issues such as business investment and productivity and show that Osborne’s strategy of austerity has not been successful. However the Office for Budget Responsibility’s forecasts will also pose difficult questions for Ed Miliband about how a future Labour Government would balance the books. The Chancellor will be keen to exploit this.