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Can he fix it? EG Focus, CC BY

Budget 2014: Osborne can help business sustain the recovery

There is good news for George Osborne as he approaches his latest budget speech. The Bank of England is predicting the economy will grow by 3.4% per cent this year and the Office of Budget Responsibility is expected to raise its growth forecast from 2.4% to just under 3% as well. Several recent surveys also show that UK manufacturers are enjoying strong growth both across the country and in export orders, with overall confidence in the manufacturing sector growing.

All that said, and with little more than a year to go before the next election, Osborne would be premature to celebrate just yet and more will be needed to anchor those encouraging signs in business and industry. Despite the government’s austerity measures, the UK’s underlying fiscal position remains relatively weak. While the Bank of England has helped keep the economy moving with low interest rates and quantitative easing, the government has not managed to reduce the nations’ debts or bring down our deficit anywhere near as much as it should have. This leaves Osborne with a rather tricky balancing act to pull off – to recognise and take political credit for the green shoots while at the same time explaining to the public that there is still a long and slow recovery ahead.

In terms of what we can expect, many of the announcements have already been trailed and it is clear that Osborne wants to make this year a “budget for business”.

Energy costs remain a huge issue for the UK manufacturing sector and while ministers have limited powers to directly affect and lower these, seems there will be some relief for the industry in the form of reductions in green taxes. Executives have routinely bemoaned these levies as a needless drag on growth and Osborne should be able to pick up some goodwill there.

Investment for growth

Businesses are also calling for an extension to the annual £250,000 capital allowance which would allow them to invest in things like equipment and offices. And smaller retailers continue to call for a reduction in business rates. It is not clear which of these demands Osborne will meet but one issue voiced across the business sector is that of a significant skills shortage. We would expect to see, therefore, some measures which serve to boost government-backed apprenticeships as well as other training and development support.

But, of course, it can’t only be about currying favour with business, because Osborne has the 2015 general election firmly in view. In his penultimate budget before the country goes to the polls and even given the ongoing fiscal constraints, he must also decide the extent to which he can – and should – begin to woo voters.

The Liberal Democrats have already made a lot of noise about the government’s plans to raise the personal income tax allowance to £10,500 which will please many low earners in particular. Tory party grandees and backbenchers were also, over the weekend, piling on the pressure on behalf of Middle Britain. They’d like to see Osborne increase the threshold at which the 40% tax rate kicks in. On current plans, anyone earning more than £41,865 will be caught. This would be a popular measure no doubt but it would also be an expensive one – it’s not certain which way Osborne will go on this.

What is certain is that the budget will contain a package of measures aimed at homebuyers. In addition to the announcement of a £200 million fund to help create a new garden city in Ebbsfleet in Kent, Osborne will also extend the equity loan-based Help to Buy scheme from 2015 until 2020.

More speculatively, it remains to be seen whether he will make any changes to stamp duty. Lifting the point at which stamp duty rises from 1% to 3% (from £25,0000 to £30,0000) has been floated and would be extremely well received but would also cost hundreds of millions in lost revenue. Some analysts are calling for a more wide-ranging reform of the stamp duty system, and one that would remove the sudden and significant jumps at the various thresholds, but there is no indication from Her Majesty’s Treasury that this is likely to happen any day soon.

What is the man or woman in the street likely to make of it all? With wages still rising slower than inflation, domestic energy bills riding high and benefits taking a hit, the “feel good factor” is going to be somewhat muted, whatever Osborne announces on all of the above. We should welcome the good news on growth. It is a step in the right economic direction. To make the recovery sustainable, however, British businesses must be given the flexibility to grow and the electorate will have to stomach many tough decisions and frugal years ahead.

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