The Chancellor will hit austerity accelerator hard and then ease off ahead of 2020 general election
The budget and barbecue seasons don't normally coincide. However, this July we may find ourselves discussing George Osborne's latest fiscal adjustments over a hot dog and maybe a beer (for which the Chancellor abolished the duty escalator a couple of years ago).
Speculation will heat up in the coming weeks as to what measures George Osborne will announce (alongside the usual stream of choreographed leaks). So what are we likely to see?
With the shackles of a Coalition government removed, the Chancellor will be keen to deliver on the Conservative's manifesto pledges as he unveils the first Tory Budget since Ken Clarke in November 1996.
The 2015 general election, as was the case in 2010, acted as a speed camera on the pace of austerity, but the tempo over the next five years will broadly mirror the last five.
The foot will go down hard on the austerity accelerator for the next two to three years before easing off ahead the next general election in 2020.
This is because there is a strong political incentive to frontload the most painful and unpopular fiscal measures.
The plan is for a return to real terms public expenditure growth in the run-up to 2020. Meanwhile, the Government is also likely to accelerate the sell-off of state assets.
The biggest tax changes are expected to be announced sooner rather than later. In June 2010, the Emergency Budget that followed the general election raised the Vat rate to 20%. This is the most significant tax rise of Osborne's tenure to date. The Tories have pledged not to raise the rates of Vat, National Insurance contributions and income tax rates. These three taxes account for over 60% of all revenue.
While the rate of income tax won't be raised, there is scope to raise more revenue in other ways. The sustained effort to clampdown on tax avoidance will continue.
Meanwhile, we are likely to see scores of tax reliefs abolished. To offset this, we are likely to see the introduction of less expensive media-friendly reliefs.
A recent editorial in The Economist magazine railed against the current worldwide reliefs/subsidies on debt. One such example is that buy-to-let (BTL) landlords can currently offset mortgage interest against tax. Perhaps we could see this scaled back or abolished. BTL landlords are also likely to see more downward pressure on rents, with further cuts to Housing Benefit payments expected.
Outside of the three biggest revenue generators, we can expect to see a return to inflation-busting rises on alcohol, tobacco, gambling duties etc. George Osborne abolished the fuel and beer duty escalators. However, we may see a return to fuel duty increases in the near future.
There is likely to be more focus on raising revenue from capital gains tax (CGT) and property. Osborne radically reformed the stamp duty land tax (SDLT) and raised stamp duty on expensive properties. The focus on bringing revenue in from buying property could now switch to the 'sell-side'.
Introducing CGT on the primary residence for properties worth say over £1m could bring in significant revenue. Politically it is a tax that doesn't jar with the "working people narrative" and is more palatable than Labour's mansion tax idea.
The 2010 Emergency Budget announced multi-year freezes across a number of fronts, including public sector pay and a range of benefits, with multi-year freezes followed by multi-year caps. More likely than not, we will see another multi-year pay and benefits freeze announced next month, with pay and benefits caps for the second half of this Parliament to be announced in subsequent budgets. Budget 2015 confirmed that proposals to abolish progression pay across the civil service have been agreed. Further detail on this could emerge on July 8.
Despite the focus on cutting expenditure and raising revenue over the last five years, there has been a tax cutting agenda too. The rate of corporation tax has been lowered from 28% to 20% and the 50% income tax rate for those earning over £150,000 was lowered to 45%. This move actually increased revenue.
Meanwhile the personal income tax allowance threshold has been raised progressively from £6,475 in April 2010 to £10,600 in April 2015.
Looking ahead, elements of this tax-cutting agenda are likely to continue. Indeed, George Osborne has promised a budget for "working people", and his party had a manifesto pledge to raise the personal income tax threshold to £12,500 by 2020 and linking the minimum wage to this allowance so that no one on the minimum wage will pay income tax at all.
The Tories will also want to further develop their image as being tough on welfare spending. A further £12bn of cuts in welfare spending is planned.
It is likely that in-work benefits will be further scaled back, with the potential for a further lowering of both the working families tax credit threshold from £40,000. However, this would jar with the budget for the "working people" narrative.
It remains to be seen exactly which cuts, palatable measures and tid-bits are thrown on the Emergency Budget barbie. But politically and economically, there's much at stake.
- In next week's Economy Watch, we hear from Neil Gibson of the Ulster University Economic Policy Centre