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Budget 2011: Chancellor to admit higher borrowing due to “wrong type of inflation”

The Chancellor will be forced to admit in tomorrow’s Budget that medium-term borrowing will be significantly higher than planned.

The Financial Times reports that Budget forecasts to be released tomorrow will say “the wrong type of inflation” will squeeze Government finances and hit household incomes.

The pressure on household incomes will mean income tax and National Insurance contributions will not rise as is usual in an inflationary environment while benefits and index-linked Government debt are automatically linked to inflation.

Inflation will be higher than predicted by the Office of Budget Responsibility in November and as a result borrowing will be significantly higher than expected from 2012 onwards.

The OBR will also announce tomorrow it is downgrading the GDP growth rate for 2011 from 2.1 per cent to 1.8 per cent as a result of 0.6 per cent contraction in growth in the last quarter of 2010.

However these downgrades are expected to be reversed in future years because the OBR will not say the long-term potential for the economy has been compromised.

In tomorrow’s Budget the Chancellor is expected to look to raise additional revenues from Non-dom taxes, introduce a new tax on private jets, launch a £100m pot-hole fund and introduce further tax anti-avoidance measures.

Osborne may also announce plans to consult on the Office of Tax Simplification’s recommendation to merge National Insurance and income tax.The move was called for in a recent OTS report which suggested it should be a “long-term” objective.

At a recent event, Osborne hinted that the Treasury may look to make changes to the EIS and VCTs in the Budget. Experts predict the Chancellor may clamp-down on limited-life VCTs.

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  1. Wrong kind of snow and wrong kind of leaves on the line come to mind.

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