Did Rishi Sunak do whatever it takes?

The chancellor's Spring Statement will leave a lot of economic pain. But there are no easy choices right now

March 23, 2022
Imageplotter / Alamy Stock Photo
Imageplotter / Alamy Stock Photo

Rishi Sunak originally wanted Wednesday’s Spring Statement to be a low-key event, featuring new official forecasts of an economy and public finances emerging from the pandemic. Instead, the chancellor of the exchequer has presented a formal Budget in all but name, taking new steps to ease the cost-of-living squeeze and pledging to cut the basic rate of income tax in two years’ time. Still, the overall package falls far short of the massive interventions he made in the struggle against coronavirus and will provide only limited support to households trying to cope with vaulting inflation.

As expected, Sunak gave a helping hand to motorists who are facing record high prices. At a cost of £2.4bn to the exchequer, fuel duty has been lowered for a year, from 58p per litre for both diesel and petrol to 53p. That will bring down the pump price by 6p after taking VAT into account. Even so, it will no more than dent the increases since the start of the year, when both petrol and diesel cost less than £1.50 a litre.

The chancellor’s second big intervention was directed towards working families. At present, workers start to pay National Insurance contributions (NICs) when they earn around £9,600 a year. Sunak is pushing that threshold up to £12,570, the same as income tax, from July, at a cost to the Treasury of £6.3bn in 2022-23. This higher starting point will take some of the sting out of the new Health and Social Care Levy, which will raise the employee NIC rate from 12 to 13.25 per cent from April.

Sunak’s third big measure was aimed at the Conservative backbenchers, who wonder why a Tory chancellor is presiding over the highest tax burden since the late 1940s. He put a down-payment on income tax cuts to come by pledging to reduce the basic rate from 20p in the pound to 19p in April 2024, at a cost of £5.3bn in 2024-25.

Sunak’s package of measures will alleviate some of the pressure on household finances, but it still leaves them facing the sharpest fall in living standards on record. The independent Office for Budget Responsibility (OBR), which carries out official economic and fiscal forecasts, estimates that real household disposable income per person will fall by 2.2 per cent in 2022-23, the biggest hit on records going back to the mid-1950s. That takes into account the measures in the Spring Statement, together with the package of help towards energy bills that Sunak announced in February. Overall, the chancellor has offset only about a third of the fall in living standards that would otherwise have occurred.

Could Sunak have done more? The OBR confirmed that the public finances are in much better shape in the current financial year, ending this March, than it had expected at the time of the Budget in October. Then, it was forecasting a deficit of £183bn (7.9 per cent of GDP) in 2021-22. Now it envisages public sector net borrowing of £128bn (5.4 per cent). The improvement of £55bn comes mainly from buoyant tax receipts but Whitehall and local authorities are also spending less than expected.

The starting point for the deficit may be better, but what matters more for the chancellor is whether the outlook for the public finances has improved or not. At first sight, it has deteriorated because of the shock to the economy arising from Russia’s invasion of Ukraine and the impact that has had on energy prices. The OBR has lowered its growth forecast for 2022 from 6 per cent in October to 3.8 per cent. It now expects inflation to peak at 8.7 per cent—a 40-year high—in late 2022, a much higher peak than it envisaged in October.

However, that witches’ brew of lower real growth and higher inflation can favour the public finances, at least for a time. That’s because taxes are levied on cash incomes and spending, which are pushed up by inflation. Furthermore, the current surge in prices is coinciding with the start of a four-year freeze in the income tax personal allowance and higher-rate threshold. When Sunak announced this policy in March 2021, the Treasury expected it to raise income tax revenues by £5.8bn in 2024-25, the third year of the freeze. The OBR now thinks it will rake in £15.5bn in that financial year, easily surpassing the cost of bringing down the basic rate to 19p. 

Even so, inflation is ultimately a mixed blessing for the chancellor. One immediate downside is that it increases borrowing costs on inflation-linked debt (which makes up a quarter of total public debt). Altogether, debt interest in 2022-23 is now forecast to be £83bn, double what the OBR anticipated in October. Although benefits—including the state pension—are rising by only 3.1 per cent this April (reflecting the inflation rate last September) they will rise much more sharply in a year’s time, in response to high inflation this autumn. Public services are likely to deteriorate as departmental budgets set in cash terms over the next three financial years have to absorb higher pay settlements.

The harsh truth is that an economic shock that makes everyone poorer cannot spare the state. That’s why Sunak was unable to do more than temper the pain in his surprisingly eventful Spring Statement.