FTI Consulting Public Affairs Snapshot: 2022 Spring Statement

As expected, Ukraine has taken its toll on the UK’s growth forecast. Using the caveat that we are currently experiencing “unusually high uncertainty”, the Office for Budget Responsibility (OBR) downgraded its growth forecast for this year from 6.0% to 3.8%. The impact is felt next year too, with growth 1.8%, down from 2.1% forecast last October. In later years the situation gets better: 2.1% in 2024, up 0.5% from the previous forecast, and 1.8% in 2025, up 0.2% from the previous forecast. But these are only central estimates: the worry is that – with the situation in Ukraine yet to play out – the fallout could be considerably more severe.

Inflation, too, is grim: 7.4% this year according to the OBR, although they do envisage this falling to 1.5% by 2024. Meanwhile, the legacy Retail Prices Index measure of inflation, to which about £500bn of debt payments are linked, rose to 8.2% in February, meaning that the cost of servicing debt rises to a whopping £83bn this year – which, to put into context, buys you about six months’ worth of NHS, or almost two years of defence. That will fall in due course, but it does explain the importance the Chancellor attaches to driving debt down.

It was not all bad news, though. Increased fiscal headroom since October does grow the Chancellor’s margin of safety, which he has chosen to retain by keeping public sector net debt falling every year over the forecast period. This is a continuation of the Sunak “third way”: no spending commitments you can’t afford, no tax cuts you can’t afford, unless you can keep debt falling – particularly if you don’t know what’s round the corner.

If Treasury planning for today’s Spring Statement started as soon as the Chancellor had delivered his October Budget, the result was not the package of forward-looking, policy-driven measures envisaged then. An energy supply crunch precipitating dozens of suppliers to go bust, the economic drag of Omicron, and the emergency in Ukraine has layered crisis-upon-crisis, each hitting households where it hurts – in the wallet.

February’s energy price cap rise of 54% means the average annual household bill will climb £693 from 1st April – amid warnings of further rises in the Autumn as wholesale gas prices soar ever higher. Meanwhile, volatility in the crude oil market precipitated by the swingeing sanctions imposed on Russia has seen petrol prices hit a record high of £1.67 per litre.

While it is the direct stresses that an energy crunch forces on households that entertain headlines, for businesses it has also precipitated an inflationary emergency as production and logistics costs spiral. Dire warnings of bankruptcies and industrial shutdowns make targeted Treasury intervention difficult when every sector is feeling the pinch.

With costs inevitably being passed on, the Consumer Prices Index hit 6.2% in February, its highest level in 30 years. The Office for National Statistics reports that prices are rising across the board impacting not just energy but food, clothing, transport and recreation. With the Ukraine crisis yet to feed through, experts forecast the dial moving in only one direction.

So it came to pass that today’s statement followed a pattern of emergency budgets so familiar during the pandemic as cauterising the wound of rocketing inflation became Sunak’s central objective. The temporary 5p cut in fuel duty – from 58p to 53p per litre – is intended to be eye-catching and translate immediately to prices at pumps. But it offsets only 25% of the increase seen since January alone, and at a cost to the exchequer of £5bn.

The controversial 1.25% National Insurance rise is nevertheless still going ahead, this despite long-standing discontent from some on the Conservative backbenches. Rather than scrap the rise – intended to fund increased health and social care spending – Sunak has instead reached for a concession, raising the threshold at which people start paying, from £9,900 to £12,570, equalising it with income tax.

This will offset the rise for many and means that 70% of workers will see their tax bill cut overall. In an effort to better target the least affluent, and take the fight to the Labour benches, the Chancellor also announced a doubling of the Household Support Fund to £1bn with local authorities set to receive funding from April.

The Chancellor also linked efforts to tackle the cost of living with the Government’s net zero ambitions, scrapping VAT on energy saving materials such as solar panels, heat pumps, and roof insulation. In keeping with the tradition for set piece fiscal events, Sunak delivered a ‘rabbit out of the hat’ in the form of a 1% cut on the basic rate of income tax before the next election. Whilst naturally framed as a response to the cost of living crisis, this was also clearly delivered with the Conservative backbenches and activist base in mind.

• Fuel duty will be cut by 5p per litre.
• The Government will scrap VAT on energy efficiency home improvements.
• The Household Support Fund will be doubled to £1 billion.
• The National Insurance threshold will rise by £3,000 to £12,570.
• The basic rate of income tax will be cut to 19% by the end of the current Parliament in 2024.
• The Employment Allowance will be increased to £5,000 in April.

The Chancellor was keen to burnish his pro-business (in particular small business) credentials as part of his Tax Plan. He increased the Employment Allowance to £5,000 thus giving a tax cut worth up to £1,000 for half a million smaller businesses. As part of an effort to promote innovation and productivity, he also brought forward business rate reliefs and committed to examining how the tax system can be used to encourage employers to invest in adult training. The scope of R&D tax reliefs is also being expanded to cover data, cloud computing and pure maths.

This support comes on the back of the 50% business rates relief for eligible businesses that will be introduced from April. The Chancellor also committed to explore further options for cutting taxes on business investment and innovation, with final decisions set to be taken at the Autumn Budget.

The 2019 Conservative Election victory was rooted in large part on a desire to ‘Get Brexit Done’, however it was also a reflection of the popularity of promises on domestic policy, in particular efforts to geographically redistribute economic opportunity and the corresponding investment in infrastructure. These are lofty ambitions, and their delivery requires investment. Leading figures in the Government are aware that it will be a tough ask to go into the next election without sufficient progress however the rising cost of living also presents its own electoral threat.

As such, most critical for the Chancellor will be bringing inflation back under control, with Labour ready to pounce on any misstep. The big gamble made today was that the OBR’s figures would be more or less correct, and that a worsening situation in Ukraine will not place further pressures on the public finances. Given this context, the Chancellor played it relatively safe; and if the situation changes, then so can he.

Making political capital out of a crisis is seldom a good look, but today saw the Chancellor throw some red meat to the Tory backbenches with his central message: Yes, we can move swiftly on the cost of living; yes, we can do some tax cuts now and offer more down the line; and the reason is because this is a Government that is responsible with the public finances.

That steers a course right up to the election expected in May 2024. With a headline tax cut pencilled in just weeks before, it would be a brave politician who would jeopardise it by making unsupported spending commitments over the next 24 months. Discipline is here to stay.