Rarely has the UK’s economic outlook whipsawed as sharply as in the past two years — from gloom as the Covid-19 pandemic took hold, to hope as the economy emerged faster than expected, and back to gloom with Russia’s invasion of Ukraine. Forecasts published by the Office for Budget Responsibility alongside chancellor Rishi Sunak’s Spring Statement predict that spiralling prices will lead to the deepest fall in living standards for more than half a century. In terms of pleasing his own party, by reducing the impact of previously announced tax increases and cutting fuel duty, Sunak did what was needed. But he offered only minimal support for those hardest hit by the coming squeeze.
Sunak has been handed a fiscal windfall. Higher inflation means departmental spending increases agreed last year will be smaller in real terms, so reducing the Treasury’s bill. Workers will, meanwhile, be paying more tax, as inflation leads to higher nominal salaries — even if their actual spending power is eroded. Sunak’s decision not to increase the level of benefits, such as universal credit for the lower paid and state pensions, in line with inflation will save the exchequer even more.
It is these effects of higher inflation that allowed the chancellor to announce cuts in headline rates of personal taxes while meeting all his fiscal rules, such as debt falling as a share of national income in three year’s time. The headline-grabbing measures were to increase the salary threshold at which workers begin to pay national insurance to the same level as income tax — fulfilling an election pledge — and promising a 1p cut in income tax to 19p from 2024.
While taxes are still set to rise overall — partly as inflation will draw more people into higher-rate tax bands — the cuts are welcome. Raising the NI threshold, in particular, will help many low and middle-earners. Equalising the threshold with that of income tax is also a common sense step towards a simpler and more rational tax system. Even if doing so does not fully offset the NI rise already announced to fund health and social care, nor the continued freeze on tax thresholds in cash terms, it mitigates the impact. Sunak was right to avoid the siren song of windfall taxes on energy companies.
The measures announced appear to be aimed with laser-like focus on core Conservative constituencies. A 5p cut in fuel duty is politically expedient but poorly targeted and counterproductive for the long-term goal of reducing dependence on fossil fuels. Reforms to student loans mean graduates will see little benefit from tax cuts and, instead, help to finance them. Similarly, the very poor will get little aid: an additional £500mn for local authorities will barely compensate for soaring energy and food bills, and is a fraction of the £6.3bn cost of raising the NI threshold.
Sunak stressed the importance of creating the conditions for economic growth. But businesses will get little relief from this package. The increase in NI thresholds applies only to workers; employers will pay the same contributions as before. While Sunak will consult on revamping the allowances companies can claim back for capital investment and research, the results must wait until the autumn.
Sunak’s statement was politically shrewd: using inflation to obscure an overall rise in taxes and reduction in the pace of spending increases lessens the potential backlash. That will allow him, all being well, to cut taxes ahead of the next general election — boosting his party’s fortunes, and perhaps his own. Yet, just like after his first Budget — on the eve of the first coronavirus lockdown two years ago — he will soon need to announce further support as the outlook darkens.
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