In Brief

Budget 2016: Osborne in line for another £20bn+ windfall

Lower debt servicing costs could offset weaker tax revenues as a result of market turmoil

George Osborne might be about to get lucky for the second major fiscal policy review in a row, with lower-than-expected debt servicing costs set to hand him a £20bn boost to the country's coffers.

At the Autumn Statement in December, at which a comprehensive assessment of spending and agreed cuts within each government department was presented, stronger tax receipts and lower borrowing costs handed the Chancellor a £27bn reduction in the cost of paying down the country's massive £1.5trn debt pile.

He makes his Budget announcement next month - and analysts have been lining up to predict woes for the public finances as a result of the turbulence hitting the global economy.

The Institute for Fiscal Studies, for example, predicted the previously forecast £10bn surplus by 2019/2020 could be more than offset by lower capital gains tax revenues and a smaller-than-hoped gain in income tax receipts, as wage rises continue to disappoint during a period of ultra-low inflation. It said benefits would have to be cut further and that there was a one in four chance of unexpected tax rises.

But once again, Osborne should be able to show the economic dynamic robbing him with one hand gives back with the other. Capital Economics has calculated the rush to safe havens by investors that is causing the current market unrest is also driving down the rates of interest on government bonds, which hit a record low of 1.3 per cent last week, according to the Daily Telegraph.

This will reduce government spending by £2bn this year alone – and by £21bn over the five years to 2020.

Osborne will also gain around £2.5bn from lower expectations for inflation, notes The Times, as this also has a knock-on effect on the cost of borrowing.

This should be enough to mean Osborne can hit his mandate of achieving an overall surplus by the end of this parliament, the paper adds.

It bases this on an assumed hit from reduced capital and income tax receipts totalling £7bn in 2019-20, plus an election pledge for income tax cuts of £8bn, compared to one-year gains of £5bn and the already planned surplus of a little more than £10bn.

Osborne will also be helped by the fact that despite the wider market turmoil, growth is thought unlikely to be revised lower. Fears may be mounting over the global economy, but UK consumers are seeing their disposable income rise, employment is rising and the focus on domestic demand is insulating the UK from the China-influenced headwinds.

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