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UK budget report is likely to be presented on 8th, July.
On the expenditure side, while the government will keep the pressure on current expenditures, those have already been cut substantially since their cyclical high, and it might become increasingly complicated to decrease them further at the same pace. Barclays expects the focus to turn to housing benefits and tax credits. Both represent nearly half of total welfare spending within the welfare cap (£50bn out of £116bn).
The ability of social benefits to decrease relative to GDP is, however, conditional on the quality of the recovery. As the government pointed out, lower benefits will need to be compensated by lower taxes and higher wages, but the latter is out of the government's hands and the former is only sustainable if the recovery holds.
According to Barclays, "We see no reason to change the deficit trajectory already published in March, but recent statements by the Chancellor using the recent turmoil in Greece as the rationale point towards a possible more aggressive consolidation in the short term. Our fiscal forecasts incorporate such risk and show more aggressive deficit reduction over the next two years relative to the OBR."
However, subsequently, the fiscal effort is likely to ease substantially and the government to fall short of its promise to balance the books by 2018/19, adds Barclays. In general, institutions and think tanks are also sceptical about the government's fiscal strategy. While the IFS has been pointing out the challenges to spending cuts, the OECD has been calling for a slower pace of consolidation to minimise the effect on economic activity.
