What was in and more importantly what was left out of today’s Spring Statement

The background

This Spring Statement was initially supposed to be little more than an update on economic and fiscal forecasts. However, it has been overtaken by events; namely the cost-of-living crisis which has been exacerbated by the Russian invasion of Ukraine. As a result, the Chancellor, Rishi Sunak, has had to add a number of policy measures to today’s speech and to revisit some of the tax rises he announced last Autumn.

The outlook

The forecasts though are still of significant interest. Not surprisingly, economic growth for 2022 and 2023 have been slashed, while projections for inflation have moved in the opposite direction. The government’s independent adjudicator, the Office for Budget Responsibility (OBR), expects CPI (Consumer Price Inflation) to top 9% this Autumn, which is the highest rate since the early 1980s. Inflation for 2022 as a whole is set to average 7.4% and for 2023 it is set to average 4%. This isn’t surprising, but it frames the stark reality of the cost-of-living crisis we now face. Indeed, the OBR said 2022 will see the biggest annual fall in living standards since 1956.

The policy measures

In terms of the policy measures announced, as expected, there was a temporary cut in fuel duty (an estimated £3.30 per 55-litre tank of petrol). This is welcome but the 5p per litre reduction announced by the Chancellor is the minimum that was anticipated and is smaller than corresponding reductions in other European countries. Indeed, even with this cut, the UK will still be bringing in more revenue from fuel duty than it did a year ago due to the scale of price increases experienced.

There was also a cut in VAT to zero for homeowners installing energy efficiency materials such a solar panels and heat pumps or insulation. Although this fell short of the removal of the 5% VAT rate on all domestic energy that many had hoped for.

Perhaps the most significant announcement in the speech though concerned National Insurance contributions. There had been calls across the political spectrum for the deferral of the planned 1.25 percentage point hike that is due to come into effect next month. This was not forthcoming, but the Chancellor did the next best thing meaning the impact of the planned tax rise was softened, particularly for those on lower incomes. So he aligned the National Insurance contribution lower threshold with the personal income allowance. This will initially more than compensate about 70% of workers for the National Insurance increase coming in April. Around 30% of workers though will still pay more tax as a result of this change. Employers also lose out on the National Insurance front with the planned tax hike going ahead for them next month.

Overall, Rishi Sunak seemed to be trying to position himself as a tax cutting Chancellor. He provided two years of notice that the basic rate of income tax will be reduced from 20% to 19% in April 2024, just one month ahead of the General Election. In the meantime though, the income tax thresholds will be frozen for the next four years, mean that more and more people will be dragged into higher tax bands as inflation lets rip.

He was also positioning himself as a Chancellor that supports business investment. With the much-vaunted Super Deduction due to expire in April 2023, Sunak is sympathetic to the need for further incentives to jump start the UK’s lack-lustre level of business investment. He therefore indicated that there would be further announcements in the Autumn.

The omission

The biggest surprise of the Spring Statement didn’t concern what was in it, but rather what was left out. Welfare benefits are set to rise by 3.1% next month. This was the rate of inflation in September 2021 which determines the annual uplift. This will represent a significant cut in real terms and many therefore expected the Chancellor to uprate these benefits by a rate that better reflected current inflation rates (7.4% for 2022). Clearly the Chancellor is prioritising support for people in employment in order to incentivise more people into work. There will be a significant increase in 2023, given that September 2022 will see inflation at almost double-digits, but the cost-of-living squeeze will be significant until then.

The Barnet consequential

Northern Ireland will benefit from today’s Spring Statement through the Barnet Formula to the tune of around £47million. This is on top of the £300m previously allocated following the Chancellor’s household support regarding energy costs. These funds are expected to be earmarked for targeting Northern Ireland’s cost-of-living crisis. This means that whoever takes on the Communities ministerial portfolio after the Assembly elections in May will be under the microscope like never before.

Summer of discontent?

The inflation outlook is also bad news for public expenditure. It means that money allocated for public services won’t stretch as far as it otherwise would have. The next Finance Minister will also have to determine pay settlements in the highest inflationary environment since the NI Assembly came into existence. Selling 2-3% pay rises when CPI is set to top 9% is a tough ask to say the least. Clearly if pay was to rise in line with inflation, this would result in a severe squeeze in public expenditure elsewhere.

We have already seen much in the news about industrial action. The conditions are there for this to intensify in the months ahead.

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