Sunak’s Spring Statement
Lucy Thompson analyses the good, the bad and the ugly of Chancellor, Rishi Sunak’s Spring Statement.
As Chancellor Rishi Sunak delivered his Spring Statement , he bore the weight of mounting pressure to spend and borrow more to help families struggling to meet the soaring cost of living as inflation rears its ugly head.
However, you couldn’t tell from the jovial atmosphere in the Commons and Sunak’s perma-smile that we are amid a national crisis – with taxes at their highest in 70 years and inflation climbing to an eye-watering 6.2%. As Sunak said in his statement, the latter is set to worsen, with the OBR’s grim forecasting that it is set to average 7.4% this year.
Sunak used the war in Ukraine to set the tone for the statement, laying bare the impact our menu of sanctions would have on the economy, but defied calls from his cabinet to increase the defence budget. He went on to warn that the OBR report, as negative as its findings were, had not accounted for the full impact of the Russian invasion of Ukraine, and "we should be prepared for the economy and public finances to worsen, potentially significantly". Though, as many note, the cost-of-living crisis was a problem that existed well before Russian troops set foot on Ukrainian soil.
The big-ticket item of Sunak’s agenda was unsurprisingly changes to National Insurance (NI). The Chancellor has come under pressure in recent weeks to spike the planned NI rise of 1.25%, which will hit households even harder when the energy price cap rises in April. While Sunak stood firm on the rise, in a move that elicited cheers from the Commons, he raised the threshold for paying NI by £3,000, which will mean 30 million people pay less tax.
Following a concerted campaign from tabloid newspapers and Conservative MPs, he also used his mini budget to announce an immediate fuel duty cut of 5p a litre for motorists, which according to the Treasury is the "biggest cut ever" on all fuel duty rates. However, the biggest surprise in the statement, which was expected to be a series of targeted short-term measures, was the announcement that in 2024 he would cut the basic rate of income tax by 1p in the pound. Ahead of the next election, this is no doubt a move from Sunak to present himself as the ‘tax-cutting’ chancellor, modelled in the image of his hero Nigel Lawson.
Turning to business, Sunak rightly pointed out that “something is not working” with UK investment in productivity. To address this, he promised more action at the autumn budget to cut business taxes and to support business innovation by reforming R&D tax credits so they are more effective. This will help businesses contribute to the government’s Innovation Strategy and is another step forward in empowering the UK to become a ‘science superpower’.
As expected from any Spring Statement, it has already received its fair share of criticism. Many have seen the cut to fuel duty as simply a drop in the ocean given the recent huge rise in fuel costs, and despite scrapping VAT on energy efficiency measures and doubling the Household Support Fund, some say this is simply not enough to support lower-income households and reduce rising energy bills. As a member shouted in the Commons: ‘is that it?’
While many of these measures will be reassuring for people and businesses alike, are they radical enough given the extraordinary times we live in? To the delight of backbenchers, Sunak pulled a rabbit out of the hat with his cut to income tax, but as living standards fall and the cost of living rises, many will still find this statement a bitter pill to swallow.
The Budget at a glance:
Personal taxation
Income threshold for the point people being paying National Insurance will rise to £12,570 in July, a tax cut for employees worth more than £330 a year.
Basic rate of income tax to be cut from 20p to 19p in the pound before the end of this Parliament.
The Employment Allowance, which gives relief to smaller businesses’ National Insurance payments, will increase from £4,000 to £5,000 from April.
Energy and living costs
Fuel duty will be cut by 5p per litre until March 2023.
Homeowners installing green energy materials such as solar panels, heat pumps, or insulation will see VAT cut from 5% to 0% for five years.
Local authorities will receive an extra £500m for the Household Support Fund from April, creating a £1bn fund to help vulnerable households with rising living costs.
Public finances
Office for Budget Responsibility says the UK economy is forecast to grow by 3.8% this year, a sharp cut from its previous prediction of 6%.
The economy is then forecast to grow by 1.8% in 2023 and 2.1% in 2024.
Annual inflation rate was 6.2% in February, and is likely to average 7.4% for the rest of this year, but with a peak of 8.7% in the final quarter of 2022.
Unemployment rate, which is currently at 3.9%, is now predicted to be lower in every year of the OBR’s forecast.
Number of people employed between now and 2027 is expected to be 400,000 lower than before the pandemic. This is because of early retirements, long-term sickness and fewer workers arriving in the UK.
Borrowing as a percentage of GDP is expected to fall from 83.5% of GDP in 2022/23 to 79.8% in 2026/27.
Government is forecast to spend £83bn on debt interest in the next financial year, the highest on record.
By Lucy Thompson
Image Credit: Pippa Fowles / No 10 Downing Street