Background to the July 2015 Budget

The July 2015 Budget, the first under a Conservative Government since 1996, comes at a time when the UK economy is generally performing strongly. GDP growth in 2014 was at its highest since before the recession, the proportion of people in work has reached record levels, and in 2016 unemployment looks set to return to its pre-crisis level. Economic growth is expected to remain healthy in 2015, despite a slowdown in Q1.

The combination of low inflation, driven by the fall in oil prices, and improvements in earnings has recently led to average earnings growing in real terms for the first time since the start of the recession.

The Eurozone, and the intensification of Greece’s debt crisis, continues to be a risk to economic growth. At home, the sustainability of growth is dependent on productivity improving from its current period of stagnation.

The public sector remains some way off a budget surplus: the budget deficit - the difference between what the public sector spends and receives in taxes - is forecast to be £75bn in 2015/16. The Conservative's manifesto said that reduced welfare spending and departmental spending would contribute £25bn towards reducing the deficit. The Budget offers the Chancellor the opportunity to explain further where the £12bn of welfare reductions are to be made.

Public sector debt - the stock of borrowing required for past deficits - looks set to peak, at just over 80% of GDP during the year, and fall thereafter. The Chancellor believes that the debt to GDP ratio is too high, and that the only reliable way to reduce it is to run budget surpluses. Alongside the Budget, the Chancellor looks set to introduce a new rule to ensure governments do just this: the new fiscal rule will require UK governments to run a budget surplus during ‘normal economic times’.

The Budget offers the chance for the Conservatives to deliver some of their manifesto commitments. On taxation, potential candidates include raising the tax-free personal allowance, introducing a main residence allowance for Inheritance Tax, and introducing legislation to prevent increases in income tax, National Insurance and VAT.

On pensions, the Chancellor may look to make savings by reducing pension tax relief to high earners, as was proposed in the Conservative Party's manifesto.

The Chancellor may look to make further announcements about the northern powerhouse, if recent Budgets and Autumn Statements are anything to go by.

Following the Budget, the Finance Bill 2015 will be published on 15 July. The Commons Library Briefing, The Budget and the annual Finance Bill, discusses the way that Parliament debates the Budget and scrutinises the Finance Bill.

The Library will publish Economic Indicators on 7 July – the day before the Budget.