The limited Mr Osborne

TWO bits of not-so-good data for George Osborne, Britain's chancellor, to digest as he prepares his budget speech, due tomorrow at 12.30. First, public borrowing looks likely to undershoot his forecast of £148 billion for 2010-11 by less than seemed likely a month ago. Borrowing over the first 11 months of the financial year came to £124 billion, compared with £139 billion at the same stage in 2009-10. That's because tax receipts look less perky. They grew by 7.7% in the 11 months to February compared with the same period in 2009-10; the corresponding rate for January was 8.7%. If public-sector borrowing in March 2011 is roughly the same as it was in March 2010, the full-year borrowing total will be £141 billion. That is still £7 billion less than the chancellor's forecast, but there had been hopes that borrowing might be £10 billion or more below it. A second constraint for Mr Osborne is another set of nasty inflation figures. Consumer prices rose by 4.4% in the year to February, up from a 4% rate in January. The two main forces pushing inflation up were domestic heating bills (in response to higher global energy prices) and a big snap back in clothing prices, following the January sales. This latter effect is itself partly related to the surge in global commodity prices: clothing retailers have given warning that they will be passing on the effects of higher cotton prices. These price hikes may not stick. Consumers are already suffering from the combined effects of higher fuel/petrol prices, this year's increase in VAT (which has added around 1.5 percentage points to the inflation rate) and weak wage growth. Pricier garments may be left on the rails.Higher inflation restricts Mr Osborne's Budget options. It will add to the cost of those bits of public spending (pensions, benefits, index-linked bonds) that are pegged to the inflation rate. That effect is offset (and perhaps outweighed) by the beneficial effect of inflation on tax revenues, however. More importantly, the poor run of inflation figures makes the Bank of England's monetary-policy committee nervous about keeping interest rates at 0.5%. The austere fiscal plans that Mr Osborne set out in his first budget last June is an important reason for the MPC to hold off from raising rates. That is why the chancellor is likely to stick with a tight fiscal stance tomorrow.