UK economy hit by 'double whammy' on eve of Osborne's Budget

Published by Jon Land for 24dash.com in Central Government

George Osborne was today given a double whammy of economic bad news as he put the final touches to his second Budget as Chancellor.

On the eve of tomorrow's statement, official statistics showed inflation rising to a two-year high of 4.4% while borrowing spiked upwards to £11.8 billion in February, diminishing hopes of a significant undershoot on the Government's target of £148.5 billion for the financial year.

The combination of higher inflation and increased borrowing is likely to cast a pall over what Mr Osborne has sought to present as a "Budget for growth".

The independent Office for Budget Responsibility is widely expected to downgrade its prediction of GDP growth in 2011 from 2.1% to around 1.8% tomorrow, as well as revising its borrowing forecasts upwards.

Meanwhile, an international survey suggested that Mr Osborne will have his work cut out to dispel public gloom about the economy.

The Ipsos MORI Global Advisor poll of 24 countries found just 12% of Britons rating the state of the economy as "good" and 11% expecting it to strengthen over the next six months - more pessimistic than anyone except the French and Japanese.

By contrast, 64% of Germans and 66% of Canadians thought their economies were doing well and 73% of Brazilians and 61% of Indians expected to see improvement in the coming months.

Mr Osborne has cast the Budget as the moment the Government moves "from rescue to reform", building on the deficit-reduction measures of 2010 with a business-friendly package to boost jobs and growth.

He has promised the public will not be asked to swallow any further tax hikes or spending cuts, insisting that last year's £81 billion package is enough to wipe out Britain's deficit by the end of the Parliament.

And he has dismissed Labour's call for a Plan B of slower and gentler cuts, which he insists would be "a huge mistake" and risk shattering market confidence in the UK.

Expectations are mounting in Westminster that Mr Osborne will use the statement to float a controversial proposal to merge income tax and national insurance.

Supporters of the idea believe it would give taxpayers a clearer idea of the share of their income gobbled up by the state. But some Conservative backbenchers are fearful that effectively changing the basic rate of income tax from 20p to 32p will be hard to sell politically, while there are also concerns about the position of pensioners, who pay income tax but not national insurance.

Motorists are hopeful that the Chancellor will scrap - or at least postpone - the 1p hike in fuel duty scheduled by Labour predecessor Alistair Darling for April 1.

But Labour will doubtless accuse him of not doing enough to ease the pain over prices at the pumps - currently at a record £1.40 a litre for diesel and £1.33 for petrol - as the Chancellor will certainly not follow his shadow Ed Balls' call for him to reverse the recent VAT hike on fuel.

A Populus poll for The Times has suggested that cutting the cost of fuel is voters' priority for the Budget, backed by 39% of those questioned, ahead of paying off the national debt more quickly (23%), taking low-earners out of income tax (21%) and increasing funding public services (17%).

It is also thought Mr Osborne will help drivers in a more practical way by announcing an extra £100 million to fill the potholes left by the winter's severe weather.

He will offer a small financial sweetener to travellers by freezing air passenger duty, but will hit the well-off to the tune of tens of millions of pounds a year with a "Learjet levy" by imposing the duty on private jets.

Mr Osborne is also expected to use the statement to detail new support for apprenticeships, a £4 billion clampdown on tax avoidance and an increase in thresholds to take people earning under £8,000 out of income tax altogether.

The British Chambers of Commerce urged him to deliver a "big bang for growth" by slashing red tape, cutting employer national insurance contributions and reforming the planning system.

BCC director general David Frost said: "The Budget will be judged by whether it matches rhetoric with radical action that gives businesses the confidence to invest, and enable the private sector to prosper.

"The Government can ill afford to ignore the needs of businesses up and down the country, as only the private sector can deliver growth. It must focus on creating the right environment for companies to thrive."