Osborne faces limited budget options

LONDON Mon Mar 11, 2013 6:08pm GMT

Britain's Chancellor of the Exchequer, George Osborne, speaks before the launch of the economic survey of the United Kingdom by Angel Gurria, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), at the Treasury in London February 6, 2013. REUTERS/Lefteris Pitarakis/pool

Britain's Chancellor of the Exchequer, George Osborne, speaks before the launch of the economic survey of the United Kingdom by Angel Gurria, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), at the Treasury in London February 6, 2013.

Credit: Reuters/Lefteris Pitarakis/pool

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LONDON (Reuters) - Chancellor George Osborne has limited options for pulling the economy out of its rut when he presents his fourth annual budget on March 20.

Faced with the risk of a third British recession since the 2008 financial crisis, Osborne is under growing pressure to act and he is expected to announce some measures to help investment in infrastructure, possibly offset by spending cuts elsewhere.

He may also opt to change the official remit of the Bank of England to give the central bank more room to stimulate demand.

But economists say Osborne's options are limited, given his determination to cut debt to restore Britain's financial health.

"There's no quick fix at all," said Jonathan Gibbs, investment director at fund manager Standard Life Investments. "Conventional austerity is a very slow, very painful fix."

Osborne could encourage more private-sector investment in new or existing roads and railways by either increasing the government's own financial stake in the projects or the value of the guarantees it provides to private investors.

The British Chambers of Commerce (BCC) and the CBI, two leading employers' groups, called on Monday for more investment in road repairs as a quick way to spur economic growth.

Commerzbank economist Peter Dixon thinks any infrastructure projects will be local and small in scale. "That's not to say we shouldn't do them, but I think we shouldn't expect them to have a big impact upon driving the economy forward," he said.

House building is another potential area for action. The CBI said building 50,000 affordable homes and encouraging repairs of existing houses could create more than 150,000 jobs.

BOE REMIT

Osborne may well attempt to pave the way for more stimulus for the economy from the Bank by announcing either a review of its remit, now focused on keeping consumer price inflation at 2 percent, or tweaking it.

That would be the first change to the central bank's remit since 2003, when it was switched from the task of targeting 2.5 percent inflation on the RPIX measure of price growth.

Economists say he could explicitly give the Bank more time to bring inflation under control. Other options include replacing the target rate with a 1-3 percent range or, more radically, granting the bank a mandate to also pursue an employment target, similar to the U.S. Federal Reserve's dual mandate.

Analysts note the Bank is already flexible in the way it implements its inflation remit, having failed to meet the 2 percent target for more than three years.

And Adam Marshall, the BCC's policy director, stresses the need to control inflation, with firms that import raw materials and components suffering in particular from sterling weakness.

INCREASING SME LENDING

Osborne is expected to try to get more credit flowing to small and medium-sized firms, which have benefited little from the Funding for Lending Scheme run by the Bank.

Business minister Vince Cable has called for changes to make the FLS more suitable for small firms. Bank policymakers have also suggested that new measures to spur lending are needed.

Osborne may seek to move ahead with a long-delayed plan for a so-called business bank which would help provide credit to companies struggling to get loans from commercial banks.

The BCC said the 1 billion pounds ($1.49 billion) pledged for the bank should rise to 10 billion pounds over three years.

Osborne could make the Royal Bank of Scotland and Lloyds - respectively 82 and 41 percent owned by the state - lend more to smaller businesses, said Citi economist Michael Saunders.

However, many companies may be reluctant to borrow given their low confidence in the economic outlook.

Osborne could make a further cut to the corporation tax, heed calls from the CBI and the BCC for a freeze in business rates, and take more lower earners out of the tax net.

(Additional reporting by David Milliken; Editing by Catherine Evans)

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