Economic implications

Ahead of his Budget speech, much was made of the Chancellor’s limited room for manoeuvre, one commentator having dubbed it the “Keep Calm and Carry On” Budget.

On the day, George Osborne reiterated the previously announced aim of fiscal consolidation and the path for reducing the deficit over this Parliament. He was explicit in stating that this Budget was fiscally neutral. During his speech the Chancellor highlighted the independence of the Office for Budgetary Responsibility (OBR), created last year by the incoming coalition.

The OBR created economic and fiscal forecasts as inputs for the Budget drafting process. These showed that the economy had grown by less than had been expected last November, and that inflation had been higher. The OBR then calculated forecasts based on the measures included in the Budget. They confirmed that the Budget is neutral overall.

Due to less momentum in the economy and the squeeze on household disposable income from inflation, the growth forecast for 2011 was revised down to 1.7% from 2.1%. The OBR does not expect the lost ground to be made up – in part due to higher oil prices – and expects the recovery to be weaker than those of the 1980s and 90s. Inflation is forecast to be between 4% and 5% in 2011 due to global energy and food prices, but is expected to fall back to the Bank of England’s target in the medium term.

The scenario of slow growth and a return to target levels of inflation would tend to support the view of base rates staying low by historic standards. Gilt supply for the forthcoming financial year was marginally higher than expected, due to a small increase in the reserves. The OBR affirmed its forecast for a return to a structural budget surplus in 2015-16, supporting the recent Organisation for Economic Co-operation and Development (OECD) endorsement of the Government’s fiscal plans, both of which are positive for the gilt market.

Mark Perry
Head of Fixed Income

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