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Week Ahead: Brexit dilemma for Osborne

Published: 06:34 13 Mar 2016 GMT

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The chancellor of the exchequer's eighth budget presents him with an interesting dilemma.

The first two years of a government's tenure are normally the ones when a finance minister feels he can push through the tough but necessary changes, and as George Osborne has committed to not only balancing the budget, but generating a surplus by the end of this parliament, he would dearly love to play the austerity card.

Looming on the horizon, however, is the June 23 vote on Britain's continued membership of the European Union and he'll be under instructions not to scare the (shire) horses too much ahead of that.

As ever, the budget speech will be another opportunity for Osborne to stake his claim as the natural successor to prime minister David Cameron, and he has staked his reputation on achieving a budget surplus by the end of this parliament.

Boris Johnson, his main rival for the leadership of the Tory party, is a classical scholar, and may well be hoping that achieving this goal will be a victory in the style of Pyrrhus.

A number of respected economic forecasting units appear to think this is a possibility.

Quoting forecasts from the Office for Budget Responsibility (OBR), Osborne is expected to say the country remains on track to reach a surplus in fiscal 2019/20, as required by the Charter for Budget Responsibility.

Borrowing this year is set to come in at around £78bn, a good five billion above the OBR's forecast, but the recent fall in gilt yields will result in lower interest repayments that will pretty much cover that shortfall.

Pantheon Macroeconomics thinks a projection of a £10bn surplus in 2019/20 is based on series of optimistic assumptions on future tax revenues and spending savings.

With the Conservative party enjoying only a slender majority in the House of Commons, the pressure to throw the plebs a bone or two could derail Osborne's avowed austerity plan.

“For a start, the OBR’s economic forecasts look too strong. In November, it expected GDP [gross domestic product] growth to average 2.4% over the next five years, and it will probably only nudge down that forecast next week, but GDP growth has matched or exceeded that rate in only one year—2014—since the recession,” the research house noted.

Pantheon said the OBR blithely assumes that government spending as a percentage of GDP can be cut to levels seen in the early years of the new millennium under Labour, but cautions that measures to reduce the welfare bill in recent years have produced more meagre savings that the OBR had anticipated.

“Six departments are required to cut day-to-day expenditure in 2019/20 by more than 40% from 2010/11 levels. It is questionable whether they can find such gigantic savings and still deliver politically acceptable levels of public service,” Pantheon opined.

UBS reckons the forecast amount of gilt issuance for 2016/17 to be £142bn, almost £15bn higher than in 2015/16, because of slower nominal GDP growth, an overshoot in the deficit in 2015/16 and other factors.

“So, the demands from the public sector for funding look set to remain high, underlining some of the vulnerabilities going into the EU referendum,” it predicted.

Although the economists at Capital Economics are not expecting there to be any money for giveaways, they have observed that “even during the darkest days of austerity in the last parliament, the chancellor always managed to scrape together some money to fund some populist measures”.

The research body reckons that, at the very least, Osborne will take further steps towards commitments made in the Conservative Party's manifesto commitments, such as further rises in the personal tax allowance and the basic rate tax threshold.

Hints dropped in the Sunday papers indicate the pensions industry's lobbying has paid off, and that Osborne will look elsewhere to raise revenue.

Petrol prices have fallen dramatically in the last year and a bump in the fuel duty, while unpopular, would probably provoke acceptable levels of grumbling rather than blockades of the M25 – not that anyone would notice much difference if the latter happened in rush hour.

Nevertheless, some commentators still fear a Gordon Brown-style stealth attack on Britons' pension pots. Elliott Silk, head of employee benefits at wealth manager Sanlam, said “it would be unwise to assume that there won’t be any other tinkering with the pensions system next Wednesday.”

The wealth management firm, which has a vested interest in pushing for legislation that allows pensioners more freedom in how they invest the money in their pension scheme, reckons that 39% of over-60s say they don’t know how much money they have in their pension pot, despite being close to retirement age.

If that is the case, a cynic might suggest that the chancellor is at liberty to take advantage of that ignorance and syphon a little more away.

Meanwhile, after the huge embarrassment of the government's “triumph” in negotiating a tax deal with Google – the UK's result here being akin to winning the Crown Paints Trophy in comparison to France's victory in the European Championship – the chancellor may beat his chest and threaten to crack down harder on tax avoidance by multi-national corporations.

“Overall, the Budget is likely to leave the big picture the same; namely that deficit reduction adds to the challenges facing the UK economy this year, but at least rising real earnings put households in a reasonably good position to deal with it,” Capital Economics suggested.

Elsewhere on the economic front, the Bank of England's Monetary Policy Committee (MPC) makes its interest rate decision on Thursday, with the smart money being on no change.

Across the pond, the MPC's counterparts at the Federal Reserve are set to ruminate on interest rates.

Rabobank said: “In recent weeks we have seen some encouraging data for the US economy that are likely to have bolstered the Fed’s confidence. At the same time, not all the doves are convinced and they would like to see more evidence of inflation moving back toward the 2% target. This suggests that we should not expect a rate hike as early as next week, but we may see a consensus forming by the June meeting.”

On the corporate front, Legal & General, Sainsbury's and Smiths Group are among the big names schedule to update, while further down the food chain results from Kurdistan-focused oil producer Gulf Keystone will be eagerly anticipated.

 

Significant announcements expected

Monday

Finals: Applegreen PLC (LON:APGN), NMC Health plc (LON:NMC)

Tuesday

Finals: Evraz plc (LON:EVR), Futura Medical PLC (LON:FUM), Gem Diamonds Ltd (LON:GEMD), Hansteen Holdings plc (LON:HSTN), Hastings Group Holdings PLC (LON:HSTG), Huntsworth PLC (LON:HNT), Premier Technical Services Group PLC (LON:PTSG), The Gym Group PLC (LON:GYM), Antofagasta PLC (LON:ANTO)

Interims: Kalibrate Technologies PLC (LON:KLBT), Legal & General Group PLC (LON:LGEN), Sainsbury (J) PLC (LON:SBRY)

Economic: US – Producer prices, Retail sales, Empire State manufacturing index

Wednesday

Finals: Advanced Medical Solutions Group PLC (LON:AMS), Hikma Pharmaceuticals PLC (LON:HIK), SkyePharma PLC (LON:SKP), Surgical Innovations Group PLC (LON:SUN), Taptica International Ltd (LON:TAP), Tritax Big Box Reit PLC (LON:BBOX)

Interims: Finsbury Food Group PLC (LON:FIF), Produce Investments PLC (LON:PIL), Smiths Group PLC (LON:SMIN)

Economic: UK – Annual budget release, Average earnings, Unemployment. US – Building permits, Capacity utilisation rate, Consumer prices, Crude oil inventories, Federal funds rate & FOMC economic projections, Housing starts, Industrial production

Thursday

Finals: Gulf Keystone Petroleum (LON:GKP), Megafon (PJSC) (LON:MFON), Premier Farnell PLC (LON:PFL), Quarto Group (The) Inc (LON:QRT), SOCO International PLC (LON:SIA)

Interims: Vernalis plc (LON:VER)

The following widely-held stocks are trading ex-dividend on Thursday: Millennium & Copthorne Hotels, Randgold Resources, British American Tobacco, Alliance Trust, Hammerson

Economic: UK – Bank of England (BoE) Asset purchase facility, Bank of England monetary policy summary, BoE monetary policy committee's bank rate votes; EU – Consumer prices; US – Current account, JOLTS job openings, Philly Fed manufacturing index, Unemployment claims.

Friday

Final: M&C Saatchi Plc (LON:SAA)

Interim: Volution Group PLC (LON:FAN)

Trading statement: Berkeley Group Holdings (The) PLC (LON:BKG)

Economic: Preliminary University of Michigan consumer sentiment

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