In his final budget before the Europe referendum in June, the chancellor is battling to preserve his credentials as a slowdown in the economy and stagnant inflation has created a risk of missing his target of running a budget surplus by the end of the parliament in 2020.
Economists have warned that he would have to find as much as £20bn in extra revenues or spending cuts, leaving little in the coffers for vote-winning giveaways.
On Wednesday, Osborne will outline a raft of new measures to balance the books. They are expected to include:
- Deep cuts to spending, with the full brunt to be felt towards the end of the parliament;
- A rise in insurance premium tax, generating billions;
- An extra £6bn to be raised from the bank profit surcharge;
- A possible rise in fuel duty;
- Increases in “sin” taxes, including a possible minimum price for cigarettes;
- A clampdown on companies that siphon profits offshore via debt interest payments;
- Tax breaks for North Sea oil producers;
- The £16bn sale of the former Bradford & Bingley loan book.
Insurers are braced for an increase in the premium tax. Last year the chancellor raised the rate from 6% to 9.5%, generating an additional £8bn of revenues. The stealth tax increase would hit an estimated 15m homes.
The chancellor was this weekend mulling whether to increase fuel duty, which has been frozen for five years. The move would be unpopular with voters, but Osborne could use the slump in oil prices as cover.
In a further boost to the exchequer, he is expected to raise his forecasts for corporation tax receipts in the wake of last year’s overhaul of the international tax system, agreed by the OECD club of rich nations. He will say that anti-avoidance curbs, such as his “Google tax”, will force multinational companies to report more of their revenues from UK customers in Britain.
He is also expected to announce a popular tax change limiting the amount of tax relief that international companies can claim for interest payments on their debts. In future, companies that shunt interest to offshore subsidiaries will be able to claim tax breaks equivalent to only 30% of underlying UK profits, sources said.
The accountancy firm PwC warned that after a £2bn borrowing overshoot this year, Osborne will miss his targets by between £9bn and £13bn over the next four years. Its projections, which are likely to be similar to those initially presented to the chancellor by the OBR, suggest that instead of a £10bn surplus in 2019-20, there will still be £1bn of borrowing. As a result, the chancellor is expected to announce further cuts in spending towards the end of the parliament.
John Hawksworth at PwC, said the budget would be “tough”, although Osborne would resist swinging his axe “too fiercely given the current fragile state of the global economy and the EU referendum”.
Alongside the budget, the Treasury is expected to publish a new “tax road map” for companies, with an update on his lengthy review of business rates.
The CBI yesterday urged the chancellor to reform the outdated regime for business rates, as well as support investment through increased capital allowances.
“The UK needs to be able to grow its way out of the deficit. The government must send a clear signal that it stands behind business in driving jobs and prosperity,” said Rain Newton-Smith, the CBI’s director of economics.
The lobby group made a last-minute plea to soften the impact on business of the national living wage and the apprenticeship levy. It said the two measures would cost business £9bn a year by the end of the decade.