The 2014 Budget: Presenting The Pre-Election Narrative

BMI View: The UK 2014 budget was never going to be a game changer in economic terms given the strict fiscal course set out by the ruling coalition upon forming government in 2010. However, make no mistake, this is a big budget in political terms. The ruling Conservative party has clearly set out its campaign strategy ahead of the 2015 general election, which we believe will start to feed through to opinion polls over the course of the next year. Given the minimal difference in support between the main ruling and opposition parties, the race in 2015 will be extremely close.

Having set out a stringent course for reining in the public finances upon coming to office in 2010, UK Chancellor of the Exchequer George Osborne has had little room to manoeuvre in subsequent budgets beyond some tinkering around the edges. The big ticket expenditure items such as the NHS, defence, education and unemployment benefits have already been addressed in previous fiscal years, as have the main revenue generators such as corporation and income tax. In addition to the self-imposed restraints from such a dogmatic first budget, the scope to materially change the fiscal course ahead of the next election is limited by the Office for Budget Responsibility (OBR) - the independent budgetary watchdog charged with producing official economic and fiscal forecasts for the Treasury. While the OBR forecasts show an improvement in both the economic and fiscal outlook, it is not sufficient to allow much in the way of discretionary tax cuts or a spending splurge to buoy popular support.

With this in mind, expectations were low ahead of the presentation of the 2014 budget to parliament on March 19. There were some minor concessions for industry aimed at supporting investment and exports, a modest increase in the personal tax free allowance and a major overhaul in pensions. Even the latter, which marks the biggest shakeup in pensions since the state pension was introduced, will have little impact on the fiscal accounts over the medium term, although clearly has a big impact for pensioners and those saving for a pension over the long term. Although the economic implications are fairly limited, as expected, the politics of the budget packed a punch. Indeed, this is probably the most political of Osborne's five budgets as it sets out the narrative which will form the basis of the Conservative's election campaign ahead of the 2015 vote.

The Budget Clearly Targets Older UKIP Voters
UK - Voter Intentions, %

The 2014 Budget: Presenting The Pre-Election Narrative

BMI View: The UK 2014 budget was never going to be a game changer in economic terms given the strict fiscal course set out by the ruling coalition upon forming government in 2010. However, make no mistake, this is a big budget in political terms. The ruling Conservative party has clearly set out its campaign strategy ahead of the 2015 general election, which we believe will start to feed through to opinion polls over the course of the next year. Given the minimal difference in support between the main ruling and opposition parties, the race in 2015 will be extremely close.

Having set out a stringent course for reining in the public finances upon coming to office in 2010, UK Chancellor of the Exchequer George Osborne has had little room to manoeuvre in subsequent budgets beyond some tinkering around the edges. The big ticket expenditure items such as the NHS, defence, education and unemployment benefits have already been addressed in previous fiscal years, as have the main revenue generators such as corporation and income tax. In addition to the self-imposed restraints from such a dogmatic first budget, the scope to materially change the fiscal course ahead of the next election is limited by the Office for Budget Responsibility (OBR) - the independent budgetary watchdog charged with producing official economic and fiscal forecasts for the Treasury. While the OBR forecasts show an improvement in both the economic and fiscal outlook, it is not sufficient to allow much in the way of discretionary tax cuts or a spending splurge to buoy popular support.

With this in mind, expectations were low ahead of the presentation of the 2014 budget to parliament on March 19. There were some minor concessions for industry aimed at supporting investment and exports, a modest increase in the personal tax free allowance and a major overhaul in pensions. Even the latter, which marks the biggest shakeup in pensions since the state pension was introduced, will have little impact on the fiscal accounts over the medium term, although clearly has a big impact for pensioners and those saving for a pension over the long term. Although the economic implications are fairly limited, as expected, the politics of the budget packed a punch. Indeed, this is probably the most political of Osborne's five budgets as it sets out the narrative which will form the basis of the Conservative's election campaign ahead of the 2015 vote.

The Budget Clearly Targets Older UKIP Voters
UK - Voter Intentions, %

Broadly speaking, we believe that there are three key takeaways. First, by sticking rigidly with Plan A - uncompromising fiscal austerity - the Conservatives can claim to be the only party serious about addressing the UKs long-term fiscal and economic challenges. Polling shows that Prime Minister David Cameron and George Osborne consistently rate more highly on managing the economy than their opposite numbers - Ed Miliband and Ed Balls - even though their personal popularity has suffered. The economy is by far the biggest policy issue in the eyes of the electorate (immigration is not far behind) and so perceptions of economic competence among the main parties matters a big deal. We have long argued that despite the relative inertia in the polls, particularly for Labour which has consistently held a vote share around 40% over the last few years (relative to the Conservative range in the high 20s to low 30s), the opposition lead will reverse unless Miliband and Balls can engineer a more comprehensive and credible economic policy platform, beyond the handful of populist measures such as clamping down on banker bonuses and freezing energy prices. This will clearly be the line of attack for the Conservatives over the course of the next year and one that will become increasingly potent.

Second, by announcing a cap on welfare benefits (excluding pensions and some unemployment payments) at GBP109.5bn in 2015-2016, which will only increase with inflation, Osborne has not only given a nod to traditional Conservative ideology (i.e. small government), but has laid a trap for Labour. If the opposition party go along with the cap it risks alienating a key segment of its support base, but if it tries to spend beyond this limit it would leave itself open to allegations of being irresponsible with the public finances. Moreover, any future government would need to seek parliamentary approval to spend beyond the cap, which would not only further politicise the welfare budget, but would also mean that government intentions to spend beyond a set limit would be much more visible to the public, which is overwhelmingly in support of welfare reform.

Finally, by lowering the duty on beer and bingo, as well as shaking up pensions, the budget clearly indicates the Conservative's intention to woo older voters. Not only that, but the legislation specifically targets older voters that have previously decamped to the UK Independence Party (UKIP) - one of the Tories' biggest impediments to securing a parliamentary majority in 2015. Older voters are not only more likely to come out and vote, but are also a key demographic for the Conservative party. Aside from the obvious populism of cutting taxes on beer and bingo, changes to savings and pensions will have a major impact on older voters who have been adversely affected by low interest rates since the financial crisis.

Labour Lead Narrowing
UK - Conservative - Labour Vote Share, pp

Even though we expect the reforms to pensions to resonate with older voters, as will the Conservative's pledge to hold an in-out referendum on EU membership in 2017 if is in office as a majority government in the next parliament, the Tories still face an uphill struggle in producing a large enough swing in the polls to snatch victory from Labour. Even though the economy is turning a corner, which in previous cycles would bolster the Tories, this time around households are not feeling any better off, which play well to Labour. In addition, there is a natural bias against the Conservatives as a result of electoral boundaries, which instead provide a natural boost to the opposition party. Finally, the collapse in support for the Liberal Democrats, which had previously limited the size of any Labour parliamentary majority, will similarly work against the Tories, particularly given that after the 2010 election many Lib Dem supporters switched allegiance to Labour and show few signs of returning.

For the Labour party, economic inequality and the rising cost of living will be the corner stone of the election campaign. Both have had a lot of resonance with voters since the financial crisis. Even if the impact of this message wanes as the economy improves, it will remain a lingering challenge facing any incoming government.

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