What can we expect from the Spring Statement?
What is the spring statement?
Clare Bentata: On 23 March the Office for Budget Responsibility will publish its latest forecast on the economy and public finances. This will be followed by Chancellor Rishi Sunak’s Spring Statement – the “mini budget”. The Spring Statement does not include major tax or spending announcements, those are set out in the Autumn budget, but smaller changes can be made.
Overall, what should we expect to see?
Dr Nikolaos Antypas: The Spring Budget announcement is not expected to include major changes in the plan drafted in the Autumn Budget last year, but it may offer some direction for the government's intentions in the next few months. The UK economy has shown relative strength during the last few years, but we can expect more pressure if the rising commodity (energy, food, agriculture) costs are not tackled soon enough, as well as if the planned increase in National Insurance goes ahead.
Overall, we should expect measures to minimise the unavoidable economic suffering for the most vulnerable UK residents instead of net positive measures for all socioeconomic strata.
What will the impact of Russia’s invasion of the Ukraine have on the budget?
Clare Bentata: Events in Ukraine have changed the economic outlook. Only a few weeks ago things were looking very different. The pandemic appeared to be coming to an end, unemployment was low, self-assessment tax receipts in January were £7.8 billion higher than forecast and confidence appeared strong. The biggest concern was inflation. The OBR report in October forecast that it could reach 4.4% in 2022.
Fast forward to March and we see a cost-of-living crisis and spiralling energy bills. Some predict that inflation may reach over 8%. This will certainly have had an impact on the OBRs forecast and the Chancellors Spring Statement.
As well as demands for tax cuts, there are demands for spending too. It is likely that the defence spending will need to increase, given the current conflict in Ukraine.
Dr Nikolaos Antypas: The real challenge for Mr Sunak is not in March 2022, but later in 2022 and 2023. The war in Ukraine and the related trade sanctions on Russia have decimated agricultural production and have led to steep supply crunches (see skyrocketing prices) in energy commodities and fertilisers. Mr Sunak may foreshadow the effect of these challenges on future budget announcements, but we may also see him laying the foundation now for a buffer level of support when it is due; this would mean no remarkable providence in the short run.
How will the Chancellor address the cost-of-living crisis?
Clare Bentata: There will have to be some response to rising living costs. There may be an increase in Child Benefit and changes to the taper rate for Universal Credit. There could also be an increase to the energy bill rebate announced in February. All these would be designed to try and target households on the lowest incomes but are unlikely to be enough to offset price rises. He could consider ‘unfreezing’ the income tax bands and allowances in order to allow these to rise with inflation. However, there have been no signs of this so far. These thresholds, which normally increase each year, were frozen in the Autumn budget until 2026.
Dr Nikolaos Antypas: Unfortunately, Mr Sunak has a difficult task in softening the incoming increase in living expenses, as steep increases in the Budget will require either additional borrowing, which will create politically negative dividends in the years ahead, or some basket of tax increases that can leave a large portion of the Conservatory base disgruntled. We may see a minor improvement in the provisions and access to, say, the Warm Home Discount scheme, but not to the extent of risking the health of state finances.
What about oil and fuel?
Clare Bentata: Some have called for a cut to fuel duty (rather than the planned freeze). Fuel prices are soaring and the cost at the pumps impacts the cost of goods in shops too. There has been a suggestion to cut fuel duty for ‘vital fuel users’ but this could be administratively complex to implement. The insurance industry has also called for a cut in insurance premium tax (currently 12%) in order to help vehicle owners. Others have asked for a cut in the VAT on energy bills. The Chancellor cannot control oil or gas prices, but he can control the tax upon them.
Will he go ahead with the planned National Insurance rise?
Clare Bentata: The Chancellor is coming under increasing pressure to announce such changes. Particularly with regard to the planned increase in National Insurance – much quoted as a 1.25% increase, but any undergraduate accounting student will tell you that moving from a rate of 12% for employees to 13.25% is actually closer to a 10% increase. A similar increase also applies to the self-employed (9% to 10.25%) and employers (13.8% to 15.05%). Many are demanding a delay or a complete halt to the increase.
It appears that the planned increase to National Insurance will go ahead despite widespread calls from both inside and outside parliament. Other suggestions such as a windfall tax on oil giants and a temporary reduction in VAT from 20% to 17.5% also seem unlikely.
As well as demands for tax cuts, there are demands for spending too. It is likely that the defence spending will need to increase, given the current conflict in Ukraine. The level of inflation will also put pressure on the Chancellor to increase salaries for key workers such as teachers and NHS workers as well as the state pension on which the so called ‘triple lock’ is currently suspended. Whilst the increase in defence spending seems likely, inflation busting increases to pay do not.
We don’t have long to wait until we find out what the Chancellors response will be to the latest OBR report. The last report was in October and since then statements from the OBR show that overall receipts have been higher than forecast and borrowing has been lower. This gives the Chancellor some headroom to make changes. Perhaps the conflict in Ukraine will give the Chancellor the opportunity to make a U-turn on the National insurance increase after all.