The Chancellor, George Osborne, will present his Autumn Statement to Parliament on Thursday morning.

He will be in the unusual position of being able to upgrade economic growth forecasts and quite likely reduce estimates of the government borrowing requirement for the next few years.

This years’ Autumn Statement takes place against a background of strong economic indicators and after three successive quarters of economic growth.

Mr Osborne will be able to argue that the government’s plan is working but he is likely to emphasise that the UK has to stay the course and focus on keeping the deficit down. He will say that austerity will last until at least 2017.

GDP Growth

This week has seen the purchasing managers’ index (PMI) reports from the manufacturing, construction and services sectors maintain the strong levels of growth seen in October which suggests the economy will probably match the 0.8 per cent growth seen in the third quarter, which followed growth of 0.4 per cent in Q1 and 0.7 per cent in Q2.

The momentum of the economic recovery has picked up since the March budget and this means the Office for Budget Responsibility (OBR) will raise its forecast for UK growth for 2013 and 2014 and also reduce public sector deficit projections.

However, Mr Osborne will stick to his fiscal stance on borrowing. He reiterated this on the BBC’s Andrew Marr show on Sunday morning when he said the government’s economic plan is working but the “job is not done”.

The next General Election is less than 18 months away and if the Conservative Party win an outright majority it is likely that there will be more spending cuts announced then.

The strategy that is likely to be adopted in the run up to then to help the Conservative Party win the election is to save a few sweeteners for next year and not to impose too many more spending cuts in the meantime.  

Energy Bills

The biggest sweetener to UK households likely to be announced in this Autumn Statement is a combination of rolling back green taxes and lengthening the time in which to comply with other environmental obligations which will reduce average annual energy bills by £50 a year or limit this year’s increases that have just been announced to around £70 rather than £120.

The cost of living crisis and energy prices are and will continue to be one of the key battlegrounds between the political parties in the run up to the Election. At its last annual conference Labour leader Ed Miliband pledged to freeze energy prices for 20 months if he was in power.

However, the main slant of the speech will be that economic policy will continue in the same way with the Chancellor arguing that it has served the UK well as it has finally come out of recession and is now enjoying the longest period of continuous growth since the financial crisis.

Government Borrowing

In the first seven months of the year, the public finances have fared better than expected and should come in this year with the deficit increasing by just over £100 billion against the forecast of £120 billion by the OBR in the March 2013 budget. So far the UK’s public sector net borrowing requirement has reached £64.8 billion.

The target of a deficit of £120 billion was based on the OBR’s forecast of growth of 0.6 per cent this year and 1.8 per cent in 2014.

This will undoubtedly be revised upwards and illustrates why the deficit will be less than anticipated.

The OBR will probably raise its forecast for growth in 2013 to 1.5 per cent and could raise the GDP growth estimate for 2014 to 2.5 per cent.

Previously it had suggested growth will pick up to 2.3 per cent in 2015, 2.7 per cent in 2016 and 2.8 per cent in 2017. The OBR will likely raise the estimate for 2015 slightly but probably keep the other years the same.

The higher growth and subsequent increased tax revenue thanks in part to higher Stamp Duty receipts due to the improving housing market and reduced unemployment and less people claiming benefits and higher tax receipts should allow the OBR to cut its deficit forecast for future years.

Its latest forecasts for the underlying Public Sector Net Borrowing Requirement (PSNBR) – which excludes the transfer of the Royal Mail’s pension fund assets and the cash balances transferred from the Bank of England’s Asset Purchase Facility are for it to fall from £120 billion in 2013/14 to £108 billion in 2014/15, £96 billion in 2015/16 and £43 billion in 2017/18.

Taking into account the improved factors, the OBR will likely lower its borrowing forecasts for the next few years and bring forward the date when it thinks government borrowing will be at its peak.

UK AAA Credit Rating

The latest forecasts should mean that the UK manages to keep its last AAA credit rating from Standard & Poor’s after it kept the UK at AAA, albeit with a negative outlook, stating that there was a one in three chance that the UK will lose its AAA rating during the next two years.

Both Fitch and Moody’s stripped the UK of its AAA credit rating in the first four months of this year, reducing it to AA+ with a stable outlook.