UK budget to show tough deficit goals still in reach

By @ibtimes on

Britain's budget on Wednesday is likely to show the government's ambitious deficit-busting goals are still within reach, but an uncertain recovery and stubborn inflation could yet disrupt its austerity plans.

Finance minister George Osborne is expected to admit growth will be weaker than he had forecast when he launched a plan last June to slash a record budget deficit. And while the government may borrow less than thought this year, the future is less rosy.

The Conservative-Liberal Democrat coalition government is attempting to eliminate most of a deficit of 10 percent of national output before the 2015 election, while also nurturing a fragile economy back to health.

However, success is far from certain on either front.

The numbers are likely to point to a gradual return toward a fiscal position which is sustainable in the medium-term, said Philip Shaw, an economist at Investec.

As George Osborne remarked recently, the government has set the right course, but there is so much more to do.

The independent Office for Budget Responsibility, set up to provide forecasts for fiscal policy, is likely to cut its 2011 growth estimate to around 1.8 percent from 2.1 percent. Last June, the OBR had forecast 2.3 percent growth this year.

Borrowing could be a few billion pounds lower for the 2010/11 fiscal year than the OBR's forecast of 148.5 billion pounds ($243.1 billion), but in coming years the profile looks set to come in higher than previously thought, with inflation stubbornly high and growth anemic.

While the OBR is likely to give the overarching austerity drive the all clear despite this possible slippage, a more sustained slide could eventually make markets nervous.

With the downside risks to growth intensifying and the ambitious borrowing targets set out for this financial year, we would be surprised if he (Osborne) deviates from the existing plans just yet, said Nida Ali, economic adviser to the Ernst & Young ITEM Club.

UNCERTAIN BACKDROP

The economy unexpectedly shrank at the end of last year and, although it is seen bouncing back this year, the recovery faces headwinds from constrained credit, weak household finances, high oil prices and the prospect of tighter monetary policy.

Inflation is more than double its 2 percent target, rising faster than expected in February to 4.4 percent on the year.

Minutes of this month's Bank of England monetary policy meeting on Wednesday showed no more policymakers had joined the camp wanting to raise interest rates, with three out of nine MPC members backing a hike and the rest wanting to hold rates at a record low of 0.5 percent.

Markets have been betting that the BoE could start to raise rates in the coming months, potentially creating a headache for a government banking on loose monetary policy to support the recovery while it slashes spending. Any delay will be a welcome relief for Osborne and his team.

The coalition -- which set four-year plan to cut public spending by about a fifth last year -- has little cash to spend to ease the pain for struggling businesses and families.

More low-paid workers are expected to be exempted from income tax, a rise in air passenger tax will be put on hold, and there is likely to be some help for motorists struggling with high petrol prices.

A government source told Reuters the budget would raise the threshold under which workers do not have to pay income tax above 8,000 pounds from 2012, saving an expected 25 million people about 45 pounds a year, and would also give help to first-time homebuyers.

However, workers will also have to contend with an already announced increase in payroll taxes from next month -- just one of an array of tax rises needed to deal with the deficit.

A much-vaunted 'growth review' will be presented, delivering a myriad of changes to business regulation, planning rules and taxation aimed at spurring growth in the private sector.

But critics say it is unlikely to prove that inspiring.

I read it last night and frankly there is nothing in it worth leaking, opposition Labour finance spokesman Ed Balls said on Tuesday, taunting Osborne in parliament.

Labour, the unions and some economists argue the government is putting the recovery at risk by cutting the deficit so fast.

The wisdom of the government's harsh four-year spending review has also been brought into question for other reasons.

British fighter jets are now operating in Libyan skies to quell attacks by Muammar Gaddafi on his own people, but any sustained military engagement could put Britain's cash-strapped armed forces under strain.

(Editing by Mike Peacock)

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