Analysis of the Spring Statement

Higher inflation, rising fuel duties and previously announced increases in taxation are all combining to point to a severe cost-of-living squeeze. In the face of this, the Chancellor unveiled some significant and welcome targeted measures in his Spring Statement to cushion the pain.

The most notable was to increase the allowance at which national insurance is paid, bringing it into line from this July with the allowance on income taxes at £12,570. The other was to cut immediately fuel duty by 5 pence per litre (to 52.95 pence) until next spring. The Chancellor also pre-announced a cut in income tax from 20% to 19% by the end of this Parliament.


  • The alignment of national insurance and income tax allowances was a big deal. It not only helps simplify the tax system but may be a stepping stone to abolishing national insurance completely. This is something many Chancellors have talked of, but none have done. This moves that closer.


  • The Chancellor did not use all the levers he could have today – for instance he chose not to increase benefits in line with the latest, higher inflation numbers. Fuel duty, meanwhile, takes up a higher proportion of incomes for lower decile groups. The Chancellor’s focus on targeting means that the combination of the increase in national insurance and the new higher national insurance allowance benefits those with incomes below around £41,000.


  • Overall, despite all this, the Office for Budget Responsibility (OBR) reported that living standards are expected to fall by 2.2% this coming year, the largest fall on record.


  • Also, despite today’s measures, previously announced policy measures and the more tax-rich composition of economic activity, the tax burden is set to rise to its highest since the late 1940s, from 33% of GDP in 2019/20 to 36.3% in 2026/27.


  • Financial markets, though, were reassured that – despite a quadrupling in debt interest payments to a record £83 billion over the next fiscal year – the public finances, while poor and vulnerable to shocks, are on an improving trend.


Many of the problems facing the economy and the public finances are outside the Chancellor’s control, but one has to put today’s welcome measures in the context of:


  • Large tax increases announced in last autumn’s Budget: future increases in corporation tax and a freezing in personal allowances.


  • The subsequent announcement of a 1.25% increase in the national insurance rate for workers and employers for this coming fiscal year, before it is replaced in April 2023 by a new health and care levy.


An economic hit this year


Alongside the Spring Statement, the OBR unveiled its new economic forecasts. As expected, they reflected the shock the economy will face over the coming year from higher inflation and from the consequences of the war in Ukraine. Inflation, though, was rising well before the war.


This year, the growth forecast is almost half and the inflation figure almost double what the OBR was expecting in their last forecast, last October.


Previously they saw growth of 6.5% and inflation of 4% this year. Now the OBR expects 3.8% growth and inflation to average 7.4%, peaking around 9% later this year. These figures are credible, although inflation could yet prove to be higher, as second-round effects take hold, namely firms raising prices to maintain margins and workers seeking higher wages.


Importantly, the OBR sees growth returning to trend around 2% relatively soon, and inflation back to its 2% target. I would not be surprised if inflation settles at a higher rate. The OBR expects growth of 1.8% next year and 2.1% in 2024. Meanwhile, inflation of 4% is forecast for next year, and 1.5% in 2024.


It is this economic backdrop that allows the OBR to project the public finances continuing on an improving trend.


The margin of error on the forecasts for the public finances is high. This is demonstrated by the fact that for this current fiscal year, government borrowing is now set to be £55 billion lower than officially forecast only last October. That makes one wonder why the Government proceeded with the now controversial hike in national insurance in the first place (by 1.25% from 12% to 13.25% for workers).


The Chancellor, though, rightly drew attention to the vulnerability of the finances to higher borrowing. That, plus slower economic growth means the deficit for 2022/23 is £16 billion higher than forecast last October.


But the good news is the trend is improving with the deficit falling and also debt to GDP declining. This suggests there is no need to panic over the state of the public finances, but the key is what happens to economic growth and inflation. Public sector net borrowing was £321.9 billion in 2020/21, down to £127.8 billion in 2021/22 and expected to be £99.1 billion in 2022/23. The debt to GDP ratio is projected to fall from 95.6% this fiscal year to 83.1% by 2026/27.


All this supports our long-held view about the need for a more pro-growth strategy. The Chancellor alluded to this at the end of his speech, when he talked about future plans to boost investment and skills training. In terms of today’s measures though, the challenge is how the economy copes with the cost-of-living squeeze.


Today’s measures to cushion this squeeze were costly. The fuel duty cut will cost £2.4 billion over this coming fiscal year. The welcome increase in allowances costs £6.25 billion over the next year. Also, today there was a £500 million boost to the household support fund. This follows the recent £9.1 billion energy bills support package.


Despite this, today’s tax cuts offset only one-sixth of the net tax increases announced since February 2020 and offset only one-quarter of the personal tax increases announced last year.


This squeeze, the war in Ukraine and today’s fiscal measures should not change the direction of UK monetary policy – which is for interest rates to rise – but they will impact the speed and the scale of tightening, with rates rising at a more gradual pace.



Please note, the value of your investments can go down as well as up.

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