No Government ever has a completely free hand when setting the Budget. But at this stage in the electoral cycle, less than a year after winning a surprise majority, one might expect the Chancellor to be able to implement his agenda relatively unhampered.
However, with elections looming at all levels – local, mayoral and Scottish – as well as the EU Referendum, the 2016 Budget will be laden with politics. At the Autumn Statement, George Osborne benefitted from a £27bn windfall from the Office for Budgetary Responsibility. There is no sign of similar luck this time. As a result of weaker than expected growth in the UK, Osborne is likely to face as much as an £18 billion shortfall in the public finances, while global risks to the economy loom large. In this context, rather than the eye-catching giveaways Osborne was hoping for, he must instead turn to more spending cuts and tax rises to “keep Britain prosperous and secure”.
Osborne hasn’t made this easy for himself. His challenge is to find reductions “equivalent to 50p in every £100” of public spending, while navigating the chicane of ring-fenced departments, protected budgets and fiscal rules he has arranged for himself. He must do all this while also ensuring the electorate remains amenable enough to vote with the Government in May and June. This will take some choreography – no wonder the noise of the BBC’s Top Gear presenters expertly executing manoeuvres on Whitehall caused the Chancellor so much angst this weekend.
If the pre-Budget speculation is to be believed, Osborne has already allowed himself one handbrake turn. The decision to pull back from reducing tax relief for wealthy pensioners proved too unpopular with middle-income households. This is perhaps the best evidence that the Government is worried about the upcoming elections. They must avoid upsetting their key demographic.
So where will the axe fall? There have been reports of a crackdown on executives using personal service companies to limit the tax they pay. There may be a rise in “sin taxes” with the introduction of a minimum price on tobacco. The motor lobby also seems likely to lose out if fuel duty is allowed to rise (if not now, then when?) and the tax on insurance premiums goes up.
These measures will raise some funds, but they are not enough to avoid further “salami slicing” of unprotected departments. The problem is that Ministers are already struggling to implement Osborne’s current plans. According to the Institute for Government, in the first six months of the 2015/16 tax year, 10 of the 16 government departments were spending more than is implied by their annual budgets. It is a worrying sign for the Government that the 2015 Spending Review does not even come into effect until April, yet the Chancellor is already altering his plans.
Of course, it won’t all be gloom and Osborne will make sure there is space in the Budget for some limited giveaways. Expect progress towards raising the threshold for the 40p tax rate to £50,000. There may also be rewards for savers, by giving employees on in-work benefits a cash bonus if they manage to save £50 a month. The former is a nod to the Conservatives’ crucial, middle-income demographic, while the latter reflects their desire to win over lower-income households attracted by the promise of rewards for “working hard and doing the right thing”, stealing ground from Labour in the process.
Then there are Osborne’s own personal ambitions, never absent from his political decision-making. This Budget comes at a time when his popularity in the Conservative Party is arguably at its lowest ebb. A recent poll of the Party faithful names Boris Johnson as the favourite to succeed David Cameron, 21 percentage points ahead of the Chancellor. Although much about the future leadership will rest on the outcome of the EU referendum, Osborne has still positioned himself at odds with many in the Party. As a result, this Budget is as much about mitigating political risk to the Chancellor as it is about protecting the UK’s finances. This is the toughest test yet for the Conservatives’ great strategist.