Background to the 2013 Budget

The Chancellor is under pressure to find ways of kick-starting the economy, following growth of just 0.2% in 2012 and the possibility that the economy may enter a triple dip recession. Output remains 3% below its pre-recession peak. Forecasters predict another year of sluggish growth for the UK economy. The weak outlook for growth has already led to the loss of the UK’s AAA credit rating. The labour market is, however, performing better with employment up by nearly 600,000 over the last year while unemployment is nearly 160,000 lower than a year ago (updated labour market figures are published on Budget day).

Various suggestions have been made for policies to boost growth including increasing infrastructure spending and further tax cuts. Such policies would require offsetting tax increases or cuts to other budgets unless borrowing was allowed to rise. Ahead of June’s Spending Review, some are questioning the Government’s decision to ring-fence certain areas of spending. There has also been some speculation that the Budget may announce a change to the Bank of England’s remit to allow monetary policy to do more to support the economy.

The Coalition’s previous Budgets have announced large increases in the income tax personal allowance, taking 2.2 million out of income tax. It is likely that there will be a further increase to meet the Coalition Agreement pledge to raise the allowance in real terms each year towards the target of £10,000. Large increases are expensive, however, and the Budget would have to set out how this would be funded.

Government borrowing fell by a quarter between 2009/10 and 2011/12. Borrowing in 2012/13 is complicated by a number of special factors obscuring the underlying trend. In the Autumn Statement, the Chancellor said that borrowing would fall this year “any way you present these figures.” This is now looking much less certain. The 4G auction raised £1 billion less than expected and borrowing over the year to date is £7.5 billion higher than last year, once the exceptional factors are stripped out. The Institute for Fiscal Studies (IFS), while stressing the uncertainty around the figures, has said that borrowing is more likely to increase slightly this year than decrease slightly.