The election on May 7 is shaping up to be the most unpredictable in decades with anti-establishment parties gaining support and big differences emerging between the Conservatives and the main opposition Labour Party on how to run the world’s sixth-biggest economy and Britain’s membership of the European Union.
With the main political parties neck-and-neck in opinion polls, Mr Osborne wants to use his budget on March 18 to try to make Britons feel they are benefiting from the economy’s turnaround.
The man who epitomises the drive to fix Britain’s public finances since 2010 is likely to announce some rare good news on the country’s still large budget deficit, giving him some room for manoeuvre. Record low inflation, pushed down by the plunge in global oil prices, will give the UK government an estimated £3bn (€4.2bn) windfall in savings in inflation-linked bond payments in the 2015/16 financial year, as well as some lower welfare outlays.
“It’s a positive for Osborne because of the lower spending and that does mean there is potential for the budget to be a ‘good news’ event for the Conservatives,” Sam Hill, an economist with RBC Capital Markets, said.
“With the opinion polls pointing to stalemate, it will be interesting if the budget gives an opportunity for the government to do something which moves the dial a bit.”
Mr Osborne has signalled he will not use the inflation savings to fund expensive gifts to voters, even if economists at Citi say he could probably afford an income tax cut worth £4.5bn and still remain on course for his latest targets. Instead, he is likely to look for more targeted ways of helping voters and may say that cuts in the next parliament will be less painful than under his previous plans, hoping to address the weariness among voters after five years of austerity so far.
Political analysts said that, in such a tight race, a sudden shift away from the government’s long-term economic plan —a phrase repeated in every speech and interview by Mr Osborne as the election approaches — would be risky for the Conservatives.
“If you spend five years saying the economy is in trouble and we need to stop spending public money, it could be a difficult sell on the doorstep,” said Peter Allen, a politics professor at London’s Queen Mary University.
Furthermore, if Mr Osborne touts the economy’s recovery too much, voters may feel austerity has done its job and turn to Labour and its less aggressive fix for the public finances. Yet Mr Osborne will want to announce some sweeteners, including probably an increase in the threshold at which earners start to pay income tax.