Osborne Should Keep Any Budget Windfall as a Buffer, E&Y Says

U.K. Chancellor of the Exchequer George Osborne should keep any surplus money in his annual budget as it won’t be enough to provide a meaningful stimulus to the economy, Ernst & Young LLP’s ITEM Club said.

The budget deficit for the fiscal year through March may come in at 120 billion pounds ($190 billion), 7 billion pounds less than the government’s fiscal watchdog forecast in November, according to a report published in London today.

Any “giveaway would have a limited macroeconomic impact and would risk sending the wrong signals to the ratings agencies and financial markets,” said Andrew Goodwin, senior economic adviser to the ITEM Club. Osborne should “use his windfall as a buffer against any potential escalation of the euro-zone crisis.”

Osborne will present his annual budget to Parliament on March 21. Britain’s economy has struggled to maintain growth as the fiscal squeeze curbed demand and the euro area grappled with the debt turmoil. Fitch Ratings last week lowered its outlook on the U.K., which the Treasury said was a reminder that it is “essential” to stick to deficit-reduction plans.

With Osborne pledging to stick to his fiscal program, the ITEM Club said the budget will contain “no large giveaways and this is a policy which we would agree with.”

The budget may return to surplus by 2016-2017 without any further policy measures, according to the group, citing the “strength” of tax revenue. Goodwin said Osborne is “well on track with reining in the public finances.”

It also forecast that unemployment will rise to close to 3 million people by the end of the year, strengthening the case for the government to introduce measures to support the labor market, it said. The jobless level was at 2.67 million in the three months through January.

Gross domestic product will probably record a “modest” increase in the first quarter, the ITEM Club said. “The outcome of the euro-zone crisis remains uncertain, but any worsening in the euro-zone outlook is balanced by stronger indicators from the U.S.”

-- Editors: Fergal O’Brien, Andrew Atkinson

Before it's here, it's on the Bloomberg Terminal. LEARN MORE