In years gone by, the start of the new financial year would be the time for a new budget. Now budgets come in the autumn. Spring is the time for interim statements. The spring statement 2022, is, however, arguably at least as important as any budget ever delivered. Here is a quick guide to its key points.
National Insurance raised
National Insurance does increase by 1.5% as planned but the threshold for paying it goes up to £12,570. This move stops well short of abandoning the rise as the chancellor was under strong pressure to do. It does, however, cushion the blow for lower earners and hence may diffuse at least some of the strongest criticism.
Future tax reductions pledged
The chancellor announced plans to cut the basic rate of Income Tax from 20% to 19% before the next election (i.e. by spring 2024). While this announcement will be welcome to many, it does come with important caveats. The foremost of these is that any tax cut in the future is not going to benefit people now.
Secondly, there is the fact that the Conservatives have shown themselves able, if not willing, to break manifesto promises. Back in 2017, former chancellor Philip Hammond attempted to raise NI in breach of a manifesto promise. Now Rishi Sunak is proceeding to raise NI in breach of a manifesto promise.
There is hence no guarantee that this pledge will be implemented. With that said, the tax cut is planned for the exact time when the Conservatives will be fighting for re-election. This probably does substantially increase its chances of being implemented.
Fuel Duty cut by 5p (temporarily)
For only the second time in 20 years, there will be a cut to Fuel Duty. As of 6 PM, the price of fuel will be reduced by 5p per litre. This cut is, however, only scheduled to last until March 2023. It’s probably fairly safe to assume that Fuel Duty will be raised again next spring. This is because lowering it flies in the face of the government’s commitment to net-zero.
Right now, however, the cut provides welcome relief to motorists and, by extension, to businesses. In fact, it may be as important as the compromise on National Insurance in protecting lower-income households from the effects of inflation.
A net-zero VAT sweetener
The government is removing VAT from home improvements that will help the UK reach its target of being carbon neutral by 2050. These include solar panels, heat pumps and insulation. Realistically, this move is probably going to have very limited practical relevance just now. It is, however, a nod to the government’s commitment to tackle climate change.
Inflation set to soar
The Monetary Policy Committee of the Bank of England is tasked with keeping inflation at 2%. It has a 1% margin of error (in either direction). The Office for Budgetary Responsibility has forecast that inflation will average 7.4% over 2022. In other words, inflation will average almost four times its target.
This has all kinds of implications. Firstly, those on lower incomes are inevitably going to be hit the hardest as they have the least room to absorb the excess costs. Secondly, the MPC is going to be under heavy pressure to raise interest rates, potentially several times. Doing so could squeeze those on lower incomes even further.
The chancellor appears to be well aware of this and has pledged to double the government’s household support fund to £1B. Only time will tell if this is enough. Realistically, a lot is likely to depend on how the economy develops.
Borrowing at a record high
Unsurprisingly, the UK’s borrowing is at a record high. It’s forecast to be 5.4% of GDP and then to drop to 3.9% of GDP in 2023. The budget deficit is forecast to be £122.8bn this year and then £99.1bn next year. These enormous sums tie the chancellor’s hands with regards to increasing spending and/or cutting taxes.