When the rubber hits the road – a Budget to terrify us all

Warnings have been used to ready us for the measures to come on Tuesday. Brian Brady, Jane Merrick and Nina Lakhani assess the likely changes

(reuters)

When George Osborne stands at the Dispatch Box to deliver his debut Budget on Tuesday, he won't be the first Chancellor to unveil a series of grim tax rises and spending cuts to bring the public finances under control.

In Margaret Thatcher's first Budget, for example, Geoffrey Howe presented a pathway to recovery from the Winter of Discontent which involved almost doubling VAT from 8 to 15 per cent and cutting income tax from 33 to 30 per cent in a shift from direct to indirect taxation. They were desperate measures for miserable times, they promised hard-eyed austerity and delivered it. And, many Conservatives maintain, they worked.

Three decades on, it is Mr Osborne who has been charged with navigating the route out of uniquely troubled times. His financial package on Tuesday will be, as David Cameron said yesterday, when "the rubber really hits the road" on the coalition's plans to reduce the deficit and lead the UK out of recession. This time, it is unlikely that any area of society will be left untouched – with rich bankers, middle-class families and public-sector workers set to find themselves worse off as a result.

The coalition will continue to blame the last government for putting it in a position where such drastic cuts have to be considered: in fact, a letter to party activists from the Tory co-chairman Baroness Warsi last week declared that "the cuts that are coming are Labour's cuts". It may not, in the long run, be enough to convince electorate – or to bind the coalition parties together.

The Budget is expected to include moves to keep the Lib Dem members of the Cabinet happy – including raising income tax thresholds for the poorest and green taxes on flights. But the Government's critics on the Labour benches are already preparing to dismantle Mr Osborne's proposals before they have been presented – warning that drastically cutting public spending this year risks endangering economic growth. They complain that, despite the warm words contained within the Government's otherwise fierce rhetoric on the need for cuts, its Budget will be unfairly targeted at those who can least afford to pay.

It is an infernally delicate balancing act. Mr Osborne has unapologetically stressed the need for broad reforms, but that merely widens the pool of people who could be adversely affected – and offended – by his proposals. In straitened times, his predecessors have struggled to produce a Budget that increases revenues and reduces expenditure while keeping dissent down to manageable levels – including Philip Snowden's scrupulously careful first-ever Labour Budget in 1924, Hugh Gaitskell's ill-fated effort in 1951 and Denis Healey's attempt to hold the line in the oil crisis in 1974.

Mr Osborne goes into his debut performance juggling a set of potential measures that could alienate some of the Conservatives' traditional supporters. The focus on public sector workers will not necessarily dent the Tory vote, but an air passenger duty would impose drastic increases on travel for middle-income families, and a squeeze on benefits, notably child benefit and tax credits, could take hundreds of pounds away from people who do not regard themselves as able to lose it. Mr Osborne will be well aware of the dangers of excessive tinkering and grand gestures that could deepen Britain's problems and explode in his face. When Winston Churchill's first Budget in 1925 shackled sterling to the Gold Standard, the "golden cage" was blamed for prolonging the economic slump, deflation and ultimately the following year's General Strike. It is on such things that careers, as well as economies, can founder.

VAT

Many analysts predict an increase in the tax on consumer spending from 17.5 per cent, with the figure of 20 per cent the most widely predicted. The attraction for Mr Osborne is that it is an easy revenue-raiser, netting around £12bn in revenue if the full rise to 20 per cent is introduced. But such a steep increase could be unpalatable, especially as it is a regressive tax, disproportionately hitting poorer families. An easier option would be to limit the rise to 18.5 or 19 per cent.

Likelihood 3/5

Green taxes

In a concession to Lib Dems, the system for taxing flights will change – inevitably increasing the cost of flying. For environmentalists, this is a welcome balancing of the tax burden. The air passenger duty, levied on individuals, will be replaced by an aviation tax per plane – to discourage airlines from flying planes that are half full.

Likelihood 4/5

Bank taxes

Mr Osborne will be cheered by the general public if he introduces taxes on banks. Such taxes are likely to be high on the agenda at next week's G20 summit. The big question is how far Mr Osborne, who has yet to convince many in the City he has what it takes, will go in taxing the banks. The IoS revealed earlier this month that civil servants were examining a combination of bank taxes, including an annual levy on profits, worth up to £8bn.

Likelihood (of some change): 5/5

Income tax/national insurance

A key part of the coalition deal was the adoption of the Lib Dem manifesto pledge for the poorest to pay less income tax. The Lib Dems wanted to raise the starting rate for income tax to £10,000, which would be costly – around £23bn a year. The Budget is likely to contain a watered-down version of this. The Conservatives promised to block Labour's "jobs tax" – a 1p increase in national insurance – but after the coalition deal they said they could protect only employers, not employees, from an increase. Mr Osborne will also announce a national insurance "holiday" for firms in "the regions" – that is, outside London and the South-east – exempting companies from paying NICs altogether on the first 10 employees they recruit.

Likelihood (of some change): 5/5

Health and social care

Despite a promise to increase health spending in real terms for the rest of this parliament, according to the King's Fund think tank, after years of substantial growth, the NHS will face an annual productivity shortfall of £20bn by 2014 unless the Government implements a pay freeze for all staff, stops efforts to further reduce waiting times and curbs investment into new hospitals. These measures would cut the shortfall by £6bn. For every percentage point VAT is increased, it will cost the NHS at least £100m. Unlike health, the social care budget in not protected, but cuts will further increase unmet need and add to pressure on the NHS by increasing hospital admissions.

Likelihood (of taking money out of the NHS): 1/5

Capital gains tax

The likely rise in CGT is emerging as the most political of the options before Mr Osborne, not least because it threatens to open a rift in the coalition. The Chancellor is expected to more than double the current rate of CGT on non-business assets from 18 per cent to 40 per cent – or even 50 per cent – to try to increase revenues. The move to bring CGT in line with the rate for higher taxpayers was central to the Lib Dems' manifesto, and several of their MPs have warned that abandoning it would leave the coalition "dangerously weak". However, Mr Osborne has faced a rearguard action against the move from some Tory backbenchers and business groups.

Likelihood (of some increase): 5/5

Tax credits/child benefit

Another area where the coalition partners have differed. The Lib Dems went into the election calling for child tax credits to be withdrawn lower down the pay scale (for families with incomes of £25,000), while the Tories favoured £50,000. More than £3bn in tax credits, which can be worth up to £2,850 a year for families with one child, is paid to families with above-average incomes every year. Mr Clegg maintained the attack, claiming they amounted to "giving a lot of money... to people who don't really need it". The potential for saving billions at a stroke has tempted Mr Osborne to consider a compromise, tapering credits away from families with incomes over £30,000, but it is risky as it threatens to hit core Tory supporters. Likewise, child benefit, which is worth up to £20.30 a week to all families with children, regardless of incomes.

Likelihood (of a reduction/freeze in spending): 5/5 for child tax credits, 2/5 for child benefits

Public sector to get hammered

David Cameron's statement yesterday made an assault upon the state sector inevitable. The Tories have long complained about a bloated public sector, claiming the New Labour years led to an increase in "non-jobs" in town halls, Whitehall and other state enterprises. Mr Cameron issued a clear warning of the changes to come as he signalled that public sector pay and pensions would have to be restrained. He insisted the Government did not have an anti-public sector agenda but, in a sign that he was prepared to risk industrial unrest, he condemned unions who have already vowed to oppose any cuts.

Likelihood (of swingeing cuts in public sector spending): 5/5

Who will feel the squeeze?

Gary Wright, 44, Gloucestershire

Job Antiques dealer

Income £300K-£400K (profit)

Concern VAT increase

"It's very annoying. I've been running my business with my wife for 29 years, and my son is now involved. We turn over between £1.5m and £2m per annum. I have just done my quarterly figures, and I would say I pay between £15,000 and £20,000 per quarter in VAT. If the rate increases to 20 per cent it would have a significant impact on my profits. The business is hard work at the moment, as currently there is not such a large volume of trade."

James Spillane, 32, Redcar

Job Shipping surveyor.

Income £20K-£30K

Concern Eradication of the Child Trust Fund

"When you see the first instalment, it's money for nothing. We would never have thought about it unless there was that first instalment. It really kick-started us. By the time children grow older, university or an apprenticeship is paid for. Our children are five and four. We got the first £250, but won't get the second. If you miss out, there's no incentive to start. This is a real shame, as it's an excellent start."

Abdi Hassan Noor, 33, west London

Job Unemployed.

Income N/A

Concern Charity which saved his life may face cuts

"I was homeless. In the end I was arrested for stealing. The charity Nacro works with the probation service, and I got a hostel place. Every month I have a one-to-one interview with a support officer. My self-belief has increased. Now I'm hoping to get an apprenticeship and a job. The government should not cut funding to charities like Nacro. They should give charities more funding, not less."

Steve Bartlett, 59, Bournemouth

Job Landlord

Income Wouldn't say

Concern Increase in capital gains tax

"I fell into being a landlord when my son needed a place to live. I now own seven properties and want to grow my business. It angers me that landlords are treated as investors, not businessmen. It will double my tax liability."

Mary Pearson, 66, Hampshire

Job Assistant library supervisor

Income Wouldn't say

Concern Loss of job

"The cuts come after restructuring three years ago. We thought we would make the best of a bad situation, but now we're facing further cuts: 172 people have been warned their jobs are at risk. We believe in what we do, and the public really values us. These cuts will rip the heart out of the service."

Caroline Gray, 46, Birmingham

Job Teaches adults with learning difficulties

Income Wouldn't say

Concern Loss of job and closure of centre

"I've been at the college for 20 years. We were told last month supportive learning for adults will close totally. We do very basic, fundamental communication skills that are vitally important for these students. Their families say it's made a huge difference to their lives. The Government says people must take some pain – but do they realise the catastrophe this inflicts on people's lives?"

Keith Andrews, 55, Swansea

Job Road sweeper

Income £230p/w

Concern Loss of job

"My take-home pay for a five-day, 37-hour week is £230. We haven't had an increase this year. I live alone in a two-bedroom flat. My rent has gone up £3.15 this year. I have never known a fear factor like this since the 1980s when Thatcher was in. We have given up a number of things over the years to have a good public sector pension. I'd like to ask Middle England if they would walk five miles a day, litter-picking the streets of Swansea for £230 a week. The wages are obscene."

Kerith Harris, 32, Lancing, West Sussex

Job Student adviser at University of Sussex.

Income £30K

Concern Loss of job

"All the student advisers are being made redundant. There were 15 of us, all part-time. We will be replaced with a 'one-stop shop'. We know the tutors, courses and students, which means we provided personal, welfare-focused support. I've taken voluntary severance as I don't want any part of that."

Interviews by Paul Bignell and Daisy Jellicoe