Budget 2011: Govt to benefit from £8bn windfall

Public borrowing is forecast to be lower this year in a sign the government is gaining control of the public finances.

According to an Ernst & Young Item Club forecast, the government could benefit from an £8bn windfall this year as higher tax revenues and lower spending combine to reduce the pressure on Chancellor George Osborne ahead of this week's Budget.

However, the report recommends the coalition government sticks to its austerity programme of strict cuts.

On Sunday, Osborne told the BBC it would be "a huge mistake" for the government to water down its spending measures.

But Ernst & Young also said the proposed cuts, designed to reduce the government's budget deficit, had already helped to "rescue" the UK economy.

It said risks to the economic recovery in recent months had increased.

Meanwhile, the Office for Budget Responsibility (OBR) is expected to downgrade the projected rate of the UK's economic recovery this week.

In November, the OBR predicted a growth figure of 2.1% in 2011, but the organisation is now expected to downgrade its growth forecast.

Last week, the Organisation for Economic Cooperation and Development revised down its estimate of British growth from 1.7% to 1.5 for this year.

Meanwhile, a fresh upward lurch in inflation is set to strike a fresh blow in household finances on the eve of George Osborne's Budget.

The consumer prices index is expected to have risen to an annual 4.2% last month, economists warned ahead of figures due out tomorrow.

The growing gap between escalating inflation and sluggish wage growth will shrink British households' disposable income even further in 2011, economists say.

The OBR said in November inflation would be only 2.8% in 2011, but its estimates are set to rise sharply on the back of surging energy prices in new forecasts announced on Wednesday.