George Osborne is expected to put tax breaks for companies and hard-pressed families at the heart of Wednesday’s Budget but his scope for giveaways is constrained by a somber backdrop of rising inflation and weakening tax revenues.
The chancellor has promised a “Budget for growth” and could accelerate cuts to corporation tax, reinforcing Mr Osborne’s pledge to give Britain one of the world’s most competitive tax regimes.
Mr Osborne has promised to cut the main corporation tax rate by 1 percentage point annually, with plans to cut it to 27 percent in April at a cost of £400 million. Treasury officials refused to confirm or deny suggestions that the chancellor may move faster.
The growth message will be reinforced with a series of supply-side measures, such as looser planning rules, less regulation and the creation of new enterprise zones and more apprenticeships.
Mr Osborne will set out a range of measures to transfer money from the rich to low- and middle-income families, to offset the squeeze in their real incomes.
He will announce a £600 rise in the tax threshold from April 2012 to £8,045, on top of the £1,000 rise taking effect next month: the latest increase will benefit everyone earning up to £115,000.
There will also be a headline-grabbing move to cut fuel duty, with coalition insiders saying the move would be more generous to motorists than many had expected, and a new £250 million plan to help first-time housebuyers.
Mr Osborne will help to fund the measures through a £1 billion crackdown on tax avoidance and a previously announced extra £800 million tax on banks. But the chancellor otherwise is hemmed in by the tough economic situation.
A rise was announced in the annual rate of inflation on Tuesday to 4.4 percent in February, more than double the Bank of England’s target. Weak tax revenues for the same month highlighted the constraints faced by the chancellor.
Sterling hit a 14-month peak against the US dollar, rising 0.4 percent to $1.6374 and gilt yields jumped as investors anticipated that interest rate increases would be brought forward.
Contrary to expectations of a windfall of tax revenues, the rapid rise in prices has constrained the relative growth of income tax and national insurance receipts while forcing the Treasury to plan for big increases in inflation-linked social security benefits and payments to index-linked government bond holders. Mr Osborne will have to admit that borrowing will be higher, complicating his deficit reduction plans.
But the Office for Budget Responsibility will still say that the government is on course to meet its 2015 objectives, giving the chancellor scope to use some of the extract revenues collected from banks and a clampdown on tax avoidance to ease the pain families feel from rising prices.
Andrew Sentance, the most hawkish external member of the Bank’s monetary policy committee, said on Tuesday that inflation was likely to continue to rise and could easily top 5 percent this year.
The market is now betting that the first quarter of a percentage point rise in interest rates will come in July, brought forward a month from August.