Colin Lawson finds the chancellor’s spring statement inflicts more pain
These are particularly fraught and difficult times to be a chancellor. The Covid pandemic, and now war in Ukraine, have generated volatile conditions in many markets, making it especially difficult to manage the public finances. But the larger context is also worth noting. Since the Great Recession of the late 2000s, UK productivity growth has been disappointing. This made it more difficult to supply public spending, quite apart from operating austerity-oriented policies.
In the period since the autumn 2021 budget, the economy has re-established its pre-pandemic output level, but has been hit by inflation, most notably in fuel prices, and by some supply disruptions. The Office for Budget Responsibility (OBR) revised its 2022 growth forecast from 6% in October 2021 to 3.8% now. Its inflation forecast for the fourth quarter of 2022 is now a 40-year high of 8.7%. The OBR expects the largest ever fall in livings standards – 2.2% – in 2022-23.
The public finances have recovered from the pandemic more rapidly than expected, and borrowing is now expected to fall from the post-war high of 15% of GDP in 2020-21 to 5.4% of GDP in 2021-22. Borrowing in 2022-23 is now expected to be 3.9% of GDP, higher than the October 2021 estimate, because of rebates and tax cuts announced in the last budget. These will offset perhaps half the deterioration in household finances caused by higher energy and fuel bills.
The basic rate of income tax will be reduced from 20% to 19% in 2024, just before an anticipated general election. But the chancellor has not changed his decision in the last budget to keep tax thresholds fixed until April 2026. Thus, the value of tax allowances is rapidly eroding, as accelerating inflation shrinks their real value. Whether the electorate has spotted this trick is unclear.
There will be a rise of £3,000 this year in the threshold level at which National Insurance (NI) begins to be paid. NI and income tax will then start at the same point. This rise was ten times the level planned in the last budget. It will cost £6bn and affects 30 million people. However, in the last budget, NI rates were increased by 1.25% from April 2022 to help fund the NHS and social care. Again, giving with one hand and taking with the other.
An immediate cut of 5p a litre on fuel duty was made – but only for a year. Realistically, it is unlikely to be reimposed shortly before an election. Almost immediately, the AA claimed that about half the cut was not being passed on. The Household Support Fund, administered by local authorities to help poorer households in difficulties, will rise by 100% to £1bn. This is totally inadequate given the scale of real income falls amongst poorer households.
The pandemic blew a huge hole in the public finances. Public debt is at the sort of level where, in former times, the IMF would have raised eyebrows and wondered if it was sustainable without a major crisis.
The greatest criticism is that Rishi Sunak did not do enough to protect those who are significantly dependent on state benefits. It is quite possible that by the time of this year’s autumn budget, fuel prices will have doubled since the last budget. Inflation will have significantly eroded the value of benefits.
The Institute for Fiscal Studies’ initial response makes a broader criticism of the chancellor’s approach. Paul Johnson, its director, noted that: “If he wants to be remembered as a tax reforming chancellor… he is headed in the wrong direction. The combination of increased National Insurance rates and a reduced income tax rate will make the tax system both less equitable and less efficient. It will increase the wedge between higher taxes on earnings and lower taxes on pensions and unearned income… But [what stands out] is what was missing. In the face of what the OBR calls the biggest hit to household finances since comparable records began in 1956-57, he has done nothing more for those dependent on benefits, the very poorest… Their benefits will rise by just 3.1% for the coming financial year. Their cost of living could well rise by 10%.”
The Resolution Foundation thinks that real household incomes for working-age people could fall by 4%, or £1000, in 2022-23. For pensioners, the state pension will rise by 3.1% in April – but that is based on last September’s inflation rate. It is good for the Treasury to know in advance how much money it needs to raise – but not if that is nonsense from a welfare viewpoint.
The pain Mr Sunak inflicts will be widespread. He has also refused to increase the budgets of government departments beyond what he proposed last October. This is despite the fact that inflation is substantially higher than expected. In effect, he has cut the services they will be able to deliver without saying so – a sort of stealth tax.
Finally, it is worth noting that the chancellor is firmly against taxing the windfall profits of energy companies. The logic is either hard to understand or unpersuasive. Energy supply companies are not responsible for the profit bonus external factors have generated. The profits are not planned surpluses generated by innovative practices. Quite the opposite. And if there had been windfall losses on the same scale, the companies would have been the first to the chancellor’s door lobbying for subsidies. No doubt they would have got some. What comes through very strongly from the chancellor’s decisions in this and related areas is that we are not all in this together. Whether there is a political price to be paid for revealing his and his party’s preferences remain to be seen.