In an ideal world, George Osborne would be sitting in the Treasury putting the finishing touches to a nice, fat giveaway budget. Five years ago he imagined that by now he would have cut the deficit to below £40bn, providing the scope for some pre-election sweeteners.
Doubtless the chancellor will still have a couple of surprises to spring on 18 March, but despite the improvement in the public finances in January, the budget will still need to be a relatively frugal affair.
There are three main reasons for that. The first is that the deficit this year is going to be more like £90bn than the £37bn Osborne was expecting back in 2010. If the figures come out in line with the forecasts from the Office for Budget Responsibility, that will represent an improvement of £6bn on the previous year.
That represents painfully slow progress, especially for an economy that has been growing at a reasonable lick for the past couple of years. In the past, the tendency has been for the public finances to deteriorate rapidly in recessions and bounce back even more smartly than forecast during recoveries.
The reason it hasn’t happened this time is due to the shape of the UK economy, dominated as it is by low-paid work. People on poverty wages don’t pay tax.
The second reason the chancellor will be wary of reading too much into the size of the January budget surplus is that it is affected by the timing of self-assessed income tax. Bonuses for people on the highest salaries were delayed until 2013-14 to avoid paying income tax at 50%, and the tax on those bonuses is now rolling into the exchequer, albeit at the lower rate of 45%.
The third reason for caution is that the strength of retail sales is not being reflected in VAT receipts. Spending in the shops and online in the three months from November to January was 5.3% higher than in the same quarter a year earlier, yet VAT receipts rose from £10.4bn to only £10.6bn. That reflects heavy price discounting.
So, Osborne is really not in a position to be generous on 18 March . And if he is, voters should beware. Because what the chancellor gives now, he will take back after the election.
