George Osborne will this week offer Budget sweeteners to low earners, motorists and holidaymakers but has made plain there is no scope for giveaways or slackening the pace of cuts.
The chancellor said on Sunday that he had no need to inflict further pain through tax rises or spending cuts, suggesting he believes the new measures in the March 23 Budget will be broadly fiscally neutral.
But his room for maneuver is constrained, even though this year’s deficit is likely to undershoot the official forecast of £148.5 billion by £8 billion, according to the Ernst & Young Item Club, an independent forecaster.
Economists say the Office for Budget Responsibility will cut its 2011 economic growth forecast from 2.1 to 1.8 percent, and from 2.6 to 2.1 percent in 2012.
Mr Osborne is also negotiating with the Ministry of Defence to fund operations in Libya. Francis Tusa, a defense analyst, told Sky News: “If you are doing six-hour missions, that is £200,000 per aircraft per day.”
Against that backdrop, Mr Osborne’s Budget handouts are likely to be modest but targeted to achieve maximum political and economic impact, supported by the additional £800 million levy on banks and an expected £500 million from tackling tax avoidance.
Mr Osborne indicated on the BBC’s Andrew Marr Show that the “squeezed middle” was suffering enough. “I don’t have to come back and ask for more this year,” he said.
Mr Osborne will signal a further increase in the income tax threshold towards a target of £10,000 and scrap plans to raise air passenger duty in line with inflation, at a cost of £150 million. He will also axe a planned 1p duty rise on fuel in April – forsaking £500 million – and may go further.
That decision will save just £1 per ticket on a European flight, but will be portrayed as a sign that Mr Osborne is on the side of families struggling to pay for a summer holiday.
The OBR is likely to revise its November forecast to show household disposable income to be more “sluggish” than it thought: some households are likely to be little better off by the next election than in 2002-03.
Meanwhile, £300 million will be found for apprenticeships and other training, while the Budget will pave the way for enterprise zones to boost development. The first zones could be announced this week.
Ed Balls, shadow chancellor, said Mr Osborne was acting “recklessly”, but the chancellor rejected Labour’s calls for him to slow the pace of cuts.