The prospect of a prolonged period of high inflation and cost of living pressures, exacerbated by Russia’s invasion of Ukraine and the consequent impacts on energy prices, has left the Chancellor with a number of issues to grapple with.
Rising inflation underpins the many economic challenges
Yesterday morning, before the Chancellor stood up in the House of Commons to make his statement, consumer price inflation (CPI) for February was confirmed at over 6%. It is forecast by the OBR to average 7.4% this year, peaking at a 40 year high of 9% by the end of the year.
With people’s earnings and UK government social security payments rising at a slower rate than prices, and national insurance contribution rates set to rise from next month, Paul Johnson said prior to the Spring Statement, “you have all the ingredients for the biggest year-on-year fall in household incomes in a generation.” The OBR confirmed this historic fall, stating “we expect real household disposable income per person to fall 2.2 per cent over the coming 12 months. The largest financial-year fall on record.”
Rising inflation also impacts on the forecast growth in the UK economy. Since the Russian invasion of Ukraine, global gas prices have doubled and oil prices have exceeded $100 per barrel, which the OBR forecasts will reduce UK economic growth by a third this year from its October forecast of 6% to just under 4%.
Despite the gloomy economic outlook, the OBR point to tax receipts performing more strongly than previously predicted. This is, in large part, due to the impacts from employment not falling by as much as might have been expected, and from more people moving into the higher income tax rate brackets from the freezing of thresholds introduced for 2021-22.
This means that the Chancellor has more resources to allocate than previously anticipated.
However, at the same time, inflationary pressures offset this tax boost to the exchequer. For example, debt payments are higher than previously forecast due to increasing interest rates. Debt payments are now forecast to reach £83 billion this year, four times the debt interest payments made last year. Benefits tied to inflation will also start to feed into public spending costs, and with inflation rising, the cost of providing public services also increases, meaning money allocated to the day-to-day delivery of public services goes less far.
Policy action to address the cost of living crisis
So what has the Chancellor opted to do to mitigate the impending cost of living crisis?
The Chancellor announced a range of measures, including a 5p cut on fuel duty on a litre of petrol and diesel for one year from 6pm last night. This will cost the Treasury £2.4 billion.
He has also announced an increase to the National Insurance starter threshold which will rise to £12,570 from July, at a cost of £6 billion. This will bring the threshold at which someone pays National Insurance into line with Income tax. The Treasury states that this will result in a tax cut for nearly 30 million UK workers, and a saving for a “typical employee” of £330 in the year from July.
In the longer term, the Chancellor announced plans to cut the basic rate of income tax for English taxpayers from 20p to 19p in the pound in 2024.
Other measures included an increase of £500 million in the Household Support Fund, which is distributed via English local authorities. Scotland will receive a proportion of this increase via Barnett consequentials (see below). VAT on energy saving materials like solar panels, heating pumps and roof insulation is reduced from 5% to zero for five years, in an attempt to incentivise energy-efficient behaviours.
What does this mean for Scotland?
Many of the measures in the Spring Statement will be UK-wide. However, as readers of SPICe blogs will know, non-savings non-dividend income tax is devolved, so it will be up to the Scottish Government and Parliament to decide if Scottish income tax payers will receive an equivalent deduction to income tax rates in 2024. The changes to National Insurance thresholds and rates will affect all taxpayers in the UK.
In the immediate term, the Scottish government received £45 million in additional Barnett consequentials, which will be added to the spending envelope for next year (2022-23). The vast majority of this flowed from the UK Government “Extending the household support fund” which in England will be given to local authorities to distribute as they see fit. It will obviously be up to the Scottish Government how it wishes to distribute this money north of the border.
Responding to the Spring Statement, the Cabinet Secretary for Finance and the Economy, Kate Forbes MSP, argued that the measures did not go far enough, stating that there was nothing in the Statement that would reduce energy bills or increase the amount by which UK government benefits will be uprated. Note that the Scottish Government plans to uprate those benefits for which it is responsible by 6% in 2022-23, rather than the 3.1% that would normally apply on the basis of September 2021 inflation.
It is likely that debates on the necessary measures to mitigate the cost of living rises will rumble on for some time to come.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit, SPICe