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Ignore the defeatists

FOR ONCE, the UK has a chancellor who just seems to be getting on with his job rather than trying to hog the headlines with daily statements and initiatives to improve the economy. But Budget Day is one of two occasions each year where he is very much on display. Over the last few years, we have become used to chancellors telling us about the difficult domestic and global environment with a view to lowering our expectations.

And for Osborne, there has been no shortage of bad news. Europe remains a sore that seems unresponsive to treatment, oil prices are again heading north, unemployment is high and there is still far too much debt in the system. The -0.2% GDP number for Q4 2011 has raised fears the UK is heading back into recession.

But there are signs that the economic outlook is starting to brighten a little. Businesses certainly seems to think so. The much-watched PMI surveys for manufacturing and services are both above 50, while construction is showing buoyancy. These three indicators point to positive GDP growth this quarter. The corporate news now includes stories of planned new investments by major companies such as Nissan, Tesco, Center Parcs and Inter-Continental Hotels, clear signals that the big players are starting to believe the worst is behind us.

There is improving news from the personal sector as well. Retail sales have been stronger than expected since Christmas. The key housing market indicators – mortgage approvals, agreed sales and house prices – have all been edging upwards. And, as inflation continues to fall in 2012 and interest rates remain at 0.5% for the rest of the year, the household sector can look forward to a modest rise in real spending power and more time to unwind debt.

The global economy also appears to be moving in the right direction. The long-awaited recovery in the US is good news for Osborne as well as for President Obama’s re-election efforts. And now that the ECB is learning to behave like a central bank, some of the pressure may come off the eurozone – Greece excepted. Recession in Europe still seems likely this year but shallower than first thought with the prospect of some stability on the horizon. And the UK’s recent trade figures showing the deficit narrowing to its lowest for two years suggests companies are coping with the turbulence and the rebalancing is underway.

As he was doing his Budget sums, Osborne would have been cheered by January’s public finance figures which recorded the biggest monthly surplus (£7.8bn) for four years. Cumulative borrowing in the first ten months of the fiscal year was £15.7bn lower than in the same period last year, leading to a widely held view that the outcome for 2011-12 will under-shoot the OBR’s November forecast of £127bn.

None of this means the recovery is guaranteed to gain momentum as the year progresses, but there is a growing suspicion that the earlier pessimism may have been over-done. Certainly there is no point in Osborne making concessions on the tax front. The deficit is still huge and the national debt exceeds £1tn. This means he needs to keep the servicing charge down – in other words hang on to the AAA rating. Nothing can be given away on the tax front this year that is not taken back somewhere else.

Politically, in mid-term, this probably suits him very well since he will want to save any largesse until nearer the next election. But what the recent spate of numbers mean is that the agenda has moved on a little since the back end of last year. Rather than emergency tax changes to stave off the threat of another recession, he can focus on ways to secure the recovery, reduce the deficit and look towards the medium term and the re-shaping of activity. ?

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