This Budget was presented by a government that seemed to be preparing for an imminent general election. It promised tax cuts, continued growth, lower fiscal deficits and more spending on the NHS and the welfare state.
Of course, a lot of this may not come to pass. Given the significant turbulence of the last few years, events have overtaken economic projections. Indeed, this year’s monetary and fiscal forecasts are no different; one need only look at the extent of changes to the Budget announced in just six months. But an election in 2023, ahead of a further slowdown in growth to 2% or under, seems a real possibility. If the economy does grow by nearly 4% this year, then the room to cut income tax by more than the 1p, to 19p in the pound, promised would be a distinct possibility.
Economic growth has been revised down from 6% to 3.8%. Consumer price inflation has been revised up from 4% to 7.4%, with an average of nearly 9% for the second half of the year. The main reason for this is the Russian invasion of Ukraine, which has pushed up oil, gas and a range of other commodity prices worldwide. OECD simulations show that global growth will be 1% lower than otherwise, and EU growth around 1½% down. Since the EU is still our primary export market – despite Brexit – this is certain to directly impact our ability to export goods and services to them.
Whether the October 2021 GDP and inflation forecast would have been met will now never be known. Lingering effects from the pandemic on supply chains, from weaker activity in China and Hong Kong, and the drag from Brexit, suggested the growth forecast of 6% would have been undershot. So, the war has allowed cover for a significant revision by the OBR. Even achieving 3.8% growth may be a struggle, given the uncertainty.
One considerable domestic risk that had nothing to do with external events that have been exacerbated by it is that the UK is facing its biggest squeeze on household incomes since records began in 1956.
To quote the OBR, “real livings standards are set to fall by 2.2 per cent in 2022-23 – their largest financial year fall on record – and not recover their pre-pandemic level until 2024-25″.
But the Chancellor did nothing about this, other than a 3.1% uprating of universal credit for those on benefits. With inflation ending the year at 10%, they will be worse off. He also did nothing for those receiving pensioner credit. There was a temporary 5p/litre cut in fuel duties, which will certainly help everyone, especially heavy users. If made permanent, it will add to the costs to the exchequer in freezing duty rates, and possibly upset the climate change lobby.
How does this work?
The price of goods and services goes up in line with inflation, so VAT and excise duties are higher than previously due to the higher inflation forecast. The latest inflation forecast –7.4%, up from 4% in October – is nearly twice as fast. Crucially, the freezing of tax allowances means that more people are dragged into higher tax bands and those outside it will, over time, get dragged into it as well. Meanwhile, the unemployment rate has fallen to 3.9%, so income tax and NICs from employment income are higher than expected. With the NICs, the pre-announced rise will still go through, so there is still overall a rise in revenue.
Some of the increase was used to raise the National Insurance threshold by £3,000, £500m was promised to help vulnerable households, and some £6bn set aside for a tax cut of 1 penny in the pound in 2024. By not increasing department spending in line with inflation, it essentially means that there will be a cut in inflation adjusted expenditure, so real time cuts in Budgets.
The tax cuts have come at the price of a higher tax burden than predicted a year ago, and more inequality in incomes. As neatly summarised in table 1, the Spring Statement effectively offsets roughly 30% of the decline in living standards. And the planned cut in income tax in 2024 and increase in the National insurance threshold of £3,00 to £12,570, reverses one-sixth of the rise in the tax burden. But it still leaves the exchequer with £26bn of tax rises over the forecast period.
Interestingly, Table 3 shows the OBR estimates of the chance or probability of missing the fiscal mandate. Based on the historical record, the risk of missing both mandates in 2024/25 is estimated at 54%, with just a 46% chance of meeting them.