George Osborne to take on indebted scheme in budget in order to show a short-term boost to government's finances
The chancellor, George Osborne, will attempt to disguise the spiralling long-term costs of privatising the Royal Mail with figures in the budget that show a short-term boost to the government's finances.
Treasury figures are expected to show that taking the Royal Mail final-salary retirement scheme on to the government's books will add £28bn of pension assets to the exchequer, allowing the chancellor to cut the annual deficit and reduce borrowing costs. The decision to nationalise the postal workers' pension scheme was taken last year by the coalition, and clears the way for private contractors to run the 400-year old institution.
Osborne will argue that the savings from the lower bill for interest will be used to pay down debts, strengthening the Treasury's hand in future budgets to reduce taxes or relax cuts in welfare spending.
However, the Royal Mail scheme has liabilities of £37bn, leaving a £9bn shortfall in the fund that taxpayers will be forced to pay over the next 30 years as postal workers retire. According to Treasury estimates, the payments will raise annual public sector expenditure and public sector net borrowing over time by between £1.3bn and £1.6bn.
The announcement at the budget comes as the chancellor comes under increasing pressure to bring forward proposals to spur business investment and stimulate growth. Figures are expected to show Osborne has at least £7bn extra to spend in his budget, following a better than expected tax haul over the past year and steep cuts in the public-sector workforce.
Rightwing Conservative MPs have lobbied strongly for a programme of tax cuts, beyond the cut in the 50p top rate of tax, to encourage spending, while employers want tax cuts to reduce the cost of taking on staff. Unions and Labour want the chancellor to reverse austerity measures that they believe are sapping confidence, especially in areas already affected by high levels of unemployment.
In pre-budget advice for the chancellor, the Ernst & Young Item Club, an economic thinktank, cautioned against early spring giveaways in the budget despite predicting that public-sector borrowing will come in £7bn lower than the forecast last year by the Office for Budget Responsibility.
The thinktank said that it believed that public-sector borrowing, which is forecast by the OBR to hit £127bn in 2011/12, will in fact drop to £120bn following a strong rise in corporate tax receipts. Andrew Goodwin, its senior economic adviser, said: "The chancellor is well on track with reining in the public finances. If corporate tax receipts continue to increase at their current rate, the chancellor might even be able to meet his fiscal mandate almost a year earlier than predicted by the OBR."
But Goodwin argued that having a £7bn giveaway would have a limited impact across the economy, and risk sending the wrong signal to the ratings agencies and financial markets. "Instead, we would like to see the chancellor use his windfall as a buffer against any potential escalation of the eurozone crisis, and invest in small, low-cost measures designed to boost the UK's productive potential."
Another thinktank, the Centre for Economics and Business Research, argued that the chancellor should use the better than expected public finances to cut fuel duties and reduce taxes to boost the economy.
It warned Osborne the economy would remain weak without further support from the government. It added: "There are substantial lags between the implementation of policies and their effects on the economy. Any action taken later than now will not affect growth before the next election.
"It is also the last budget before entering the pre-election phase, where controversial pro-growth measures are ruled out by politics."