The Spring Statement 2022
By Verity Barton
Chancellor Rishi Sunak has today handed down his Spring Statement. A political update partly targeted at disgruntled Conservative MPs. It comes two years after the PM told the country to stay at home, and amid a cost of living crisis and war in Ukraine.
Sunak used his opening remarks to highlight the impact of the Russian invasion of Ukraine on the cost of living and made the point you need a strong economy to have a more safe and secure UK. However, linking rising energy costs and an increase in everyday expenses to the current crisis belies the wider reality with political risks for the Government if some of the systemic issues aren’t addressed.
With concerns about rising inflation, the Chancellor was under political pressure to ease the burden being felt by families and businesses.
With the OBR saying that public finances are better than expected following strong economic growth, there was political pressure on Sunak to do more on energy and cost of living increases for families. With a tension between sustainable public finances and addressing the immediate impact of inflation and increased prices, Sunak has tried to balance those competing priorities and use the fiscal windfall to cushion the blow. It is clear he has heeded the OBR’s warnings of uncertainty around the impact of Russia’s invasion of Ukraine to maintain a margin of safety and there will be a squeeze on living standards as a result. The political challenge for the Government is squaring its competing constituencies: fiscal conservatives who want lower taxes and spending, and their new voters who want Government to borrow to maintain living standards. Sunak is still treading a fine line and will hope for greater flexibility in the Autumn.
As inflation continues to impact day to day living and expenditure – and bite politically for the Government – it became increasingly clear that Sunak would be forced to act. While the cut to Fuel Duty was expected, doing so for a full year was not. Building on earlier announcements to address the increasing costs of energy, the Government has turned to energy efficiency measures in people’s homes, the benefit of which is three-fold: reduced energy bills, economic stimulation and a boost toward Net Zero.
On top of the recently detailed Boiler Scrappage Scheme, the scope of VAT relief for measures like on-roof solar panels, insultation and heat pumps has been expanded and the installation of these products will now be zero rated. While this will help some homeowners, the Clean Heat Grant won’t cover all purchase and installation costs, meaning some of the poorest households will not be able to take full advantage of the measure.
As part of his Tax Plan – a plan to cut taxes and stay within the fiscal rules – there is more support for the private sector and incentives to invest in people, capital and innovation. The Chancellor will work in partnership with business groups and the private sector on the detail of tax reform to drive growth and productivity, giving businesses the opportunity to shape a regulatory framework that is critical to their continued growth and success. With an increasing number of Conservative MPs worried about the size of the state, moves to encourage business to grow and invest in local communities will be widely welcomed.
Has Rishi Sunak left enough headroom for further moves in a pre-election Budget?
With the next General Election expected in about two years’ time, the Chancellor needs to balance relief now and having the flexibility for more giveaways in his 2023 Budget. While Sunak was expected to adjust the National Insurance Contributions (NICs) threshold, to move to equalise it with Income Tax thresholds immediately was not. It is quite a substantial tax cut and goes a long way to mitigate the National Insurance rise to fund the NHS and social care. With a strong emphasis on tax cuts now, and having used one rabbit from his 2023 Budget already by announcing an income tax cut for 2024, many will wonder if he can pull more rabbits out of his hat in the 2022 and 2023 budgets. Clearly the Chancellor will be hoping the predicted economic growth continues and that he can tap into the windfalls so he can cut taxes for households and business. Holding himself to the fiscal rules he set out in 2021 might mean he has boxed himself into a corner, with little room to manoeuvre, if economic growth is not as strong as hoped.
What are the political realities of this for the Government?
This was clearly a political Spring Statement to boost Conservative MPs’ morale. While it won’t have turned around the fortunes of the Government in one move – and was never expected to – it will have mitigated some of the impact of the current cost of living crisis and the criticism of Rishi Sunak as a high taxing Chancellor. Tory backbenchers will broadly welcome the announcement to increase to the NICs threshold by £3000. Alongside the cut to Income Tax planned for 2024 and business tax reforms, it will go some way to rebuilding Sunak’s credentials.
As with every economic update, the devil is always in the detail. While there is some additional grant funding for Local Authorities to help the poorest, there were no changes to Universal Credit leaving little additional support for those out of work. As living standards are further squeezed, and the cost of energy and basic foods continues to increase, Rishi Sunak is at risk of a political backlash, making the next General Election a much more open contest.