How to profit as George Osborne leans on the Bank of England

Over in Cyprus, savers are keeping their fingers crossed and hoping against hope that their government will change its mind about robbing them blind.

Here in Britain, I suspect that most of us are pretty much resigned to the idea that chancellor, George Osborne, will stand up and make us all a bit poorer tomorrow.

But how will he do it?

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Last time, the contents of the Budget were so badly leaked in advance that we all knew what he had planned. This time, he's kept his cards a lot closer to his chest.

But we can make some educated guesses. Here's what you should be looking out for, and how you can prepare for it

Expect a few freebies', but nothing to get excited about

The big theme of course, is that Osborne is sticking to his austerity plan. Changing strategy right now would be political suicide. The government has made it very clear that cutting the deficit is the priority.

(In case you haven't realised this yet: the deficit is the annual overspend. In other words, when David Cameron talks about cutting the deficit, all he means is that he wants to shrink the gap between the tax take, and the amount the government spends each year. The national debt our overall debt pile is still growing).

So the bottom line is that overall there will be spending cuts, and higher taxes.

But of course, that's never going to be popular. So it's very likely that we'll see Osborne cut taxes in one or two areas to give people something to talk about.

For example, he might well put the personal allowance right up to £10,000. It fulfills a campaign pledge and helps those on low incomes, so no one can really complain about that.

He might also reduce corporation tax more rapidly. Matthew Lynn wrote in this week's MoneyWeek magazine about why it would be a good idea to slash or scrap corporation tax altogether, but we can't see the chancellor being that bold.

And we might see him bring some infrastructure spending plans forward. There'll be lots of talk about how this will boost growth, even though the evidence suggests that such projects have a poor rate of return.

Who's going to pay for it?

Trouble is, these gifts' all have to be paid for, so taxes may well have to rise in other areas. And while there has been a lot of talk about cracking down on companies avoiding their taxes, we can't see this producing much new revenue. Accountants will simply find new ways for big firms to reduce their tax exposure.

We suspect the real losers from this Budget will be present and future pensioners. Every year there are scare stories about the chancellor fiddling with pension allowances. It suits the financial industry to put these about, because it panics people into making bigger contributions to their pensions ahead of Budget day.

Trouble is, this tactic only works because a change in the pension rules is entirely feasible. Pensions are an absolute honey pot for cash-strapped chancellors, because most people still have difficulty understanding how they work.

The chancellor could do any number of things: he could scrap higher-rate tax relief; he could cap the amount you can take from your pension as a tax-free lump sum; or he could reduce the amount you can put into a pension free from tax even more than he already has.

As we've noted before, this is one very good reason to use up your individual savings account allowance each year before you start putting money into a private pension.

(Company pensions suffer from some of the same problems, but the fact that your employer will almost certainly match your contribution means these are usually worth joining).

The Bank of England will be told to let rip

But the real event to keep an eye on is related to the other part of the chancellor's grand strategy. Osborne's big idea is that while he ham-fistedly tries to get the nation's books in order, the Bank of England will support him by keeping monetary policy as loose as possible.

So expect the banks to come under pressure to lend more. There may even be plans for the government to lend to businesses directly. But the biggest focus will be on the housing market.

Every British political party knows that the one economic indicator voters care more about than any other is the direction of house prices. A recovery in house prices would also help prop up the banks. So expect more taxpayer money to be put at risk with schemes designed to skew the structure of the UK economy even more badly towards the housing market.

Meanwhile, expect the Bank to be given leeway to pursue even looser monetary policy. The chancellor may not go so far as to blatantly scrap the inflation target. That might scare the horses a little too much. But whatever he does, it will be a green light for more money printing and continued below-inflation interest rates.

So we'd keep an eye on the pound. Fears over Cyprus and some upbeat chatter by Sir Mervyn King has helped to arrest the decline. We might even get a bounce on the day if the market decides that Osborne has done enough to help the UK economy. But it's hard to see how the Budget can be positive for the pound in the longer run.

We've already talked about ways to diversify your portfolio out of sterling. If you're interested in taking a direct punt on the pound, you could spread bet. Our trading expert John C Burford has been writing about the pound recently. You can sign up for his free MoneyWeek Trader email here.

Spread betting is of course extremely risky. If you are looking for a slightly less risky option, you could buy a currency exchange-traded product. The ETFS Short GBP Long USD (LSE: USD2) simply tracks the dollar/pound exchange rate. Do bear in mind that while it is less risky than spread betting, you can still lose money if the exchange rate goes against you. You should also monitor its performance closely this is a short-term bet, not a buy and hold' trade.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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