Chancellor George Osborne has been putting the final touches to the last Budget of this Parliament, amid speculation that he will use it to blunt Labour’s lines of attack in the upcoming general election battle.
Mr Osborne has said there will be “no giveaways, no gimmicks” in Wednesday’s Budget, and his ability to deliver a traditional pre-election statement packed with vote-winning bribes is constrained by the need to agree the package with Liberal Democrat coalition partners.
But reports suggest that the Office for Budget Responsibility will cut its forecast for borrowing over the coming financial year by as much as £6 billion, giving Mr Osborne some vital leeway for pre-election goodies.
Expectations are high that he will use at least some of this wriggle room to revise projections for government spending upwards in order to kill off Labour’s accusation that he is planning to shrink the state to a size last seen in the 1930s.
The OBR’s finding last December that Mr Osborne’s plans envisaged total public spending plunging as a proportion of GDP to “what would probably be its lowest level in 80 years” has been seized upon by Ed Miliband, who has lost no opportunity to warn that a Conservative victory would mean austerity on a scale not seen since before the creation of the NHS.
A tweak in the Budget would allow the Chancellor to announce that, while still falling over the next few years, state spending in 2019/20 will reach not the “Road to Wigan Pier”-style 35.2% forecast in December, but a figure around 36%-37% similar to that seen in the early years of the New Labour administration.
Meanwhile, The Sun reported that Mr Osborne could spike more of Labour’s guns by announcing a raid on high-earners’ pension pots, reducing the lifetime allowance from £1.25 million to £1 million.
This would raise £1.5 billion from the wealthiest in society, to pay for crowd-pleasing moves such as a possible increase in the personal income tax allowance to £11,000. And it would have the additional advantage for the Tories and Liberal Democrats of robbing Mr Miliband of the funds he has earmarked to pay for Labour’s promised reduction in university tuition fees.
Lib Dem Deputy Prime Minister Nick Clegg revealed at the weekend that he had been pressing the Chancellor for a further increase in the personal allowance beneath which no income tax is payable. The allowance has already risen from £6,475 in 2010 to reach £10,600 next month, with both Tories and Lib Dems pledging further hikes to £12,500 during the next Parliament.
But the independent Institute for Fiscal Studies has said that a better way to help the lowest-paid workers would be to lift the threshold for National Insurance, which kicks in at £7,956. In a recent report the IFS said it was an “absurdity” to concentrate on lifting ever-more workers out of income tax while leaving NI thresholds largely untouched.
Lib Dem Business Secretary Vince Cable said that it was important for the Chancellor to “get the balance right” in his sixth Budget statement.
With public services under pressure in many areas, “the scope for tax cuts is very, very limited”, said Mr Cable.
He added: “In fact, after the next election taxes are almost certainly going to have to rise.
“We will do what we can. Obviously for people on low pay it is important we help them both through the minimum wage and lifting the tax threshold, but the scope for this is very limited.”
Older voters have already been promised a boost in the Budget, with five million pensioners with existing annuities due to be granted the right to cash them in from April next year.
And business groups have been lobbying the Chancellor over their own priorities – including a freeze or cut in passenger air duty, reductions in charges on North Sea energy firms and moves to use the tax system to encourage research and development.
CBI director general John Cridland said: “First and foremost what we need is a responsible budget – let’s make sure we don’t put politics ahead of economic growth and investment.
“So let’s look to build on our hard-earned sound economic footing by creating a stable investment environment for ambitious firms looking to expand.
“And if lower inflation allows the Chancellor some room to manoeuvre, extending free childcare can lend a helping hand to families whilst supporting employment and growth in the long-term.”