A £6bn Budget windfall

March 18, 2015 Share Print 0

Wednesday’s Budget will show that by the end of the next Parliament, public spending cuts are expected to be £3bn or £4bn less than was forecast in December and the annual surplus could be around £2bn bigger.

Or to put it another way, the fall in inflation expectations generates an annual windfall for the Treasury of around £6bn.

Of this £3bn or £4bn will automatically feed through to more money being available for public services and a couple of billion will come off annual borrowing (or more accurately, by the end of the Parliament that couple of billion pounds will augment a projected surplus of £23bn).

The reason for this is that falling inflation reduces annual up-rating of welfare payments, and also reduces the interest payments the Treasury is forecast to pay on a national debt that is set to rise to £1.6 trillion next year.

As I understand it, the reduction in the squeeze to be imposed on public services is more or less automatic, rather than being a political decision by the Chancellor, George Osborne.

That is because the Treasury has given the Office of Budget Responsibility – the official forecaster of the deficit – figures for what will happen to total public expenditure for the whole of the next parliament.

And when inflation reduces outlays on welfare, that automatically implies there will be more cash available for expenditure on schools, hospitals, the police and so on.

Or to put it another way, the budget will show that there will be around £4bn a year less austerity than looked to be the case in the Autumn Statement just over three months ago.

BBC

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Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA

Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.