The UK may be recovering from the impact of Covid-19 and the public finances are in better-than-expected shape. But for households, the situation is grim. Inflation hit 6.2% in February and the Office for Budget Responsibility (OBR) expects the rate to rise still further to 7.4%. Petrol prices are at an all-time high and the cost of food is soaring, with the crisis in Ukraine exacerbating matters. With the energy price cap increasing and 1.25% added to National Insurance in April, it is a bleak picture.
It is against this backdrop that the Chancellor Rishi Sunak today sought to strike a careful balance as he delivered his Spring Statement. On the one hand, he recognised that providing financial support to ease the cost of living crisis was required. On the other, he had to demonstrate his fiscally conservative credentials – a theme he returned to throughout his speech – to retain the support of Tory backbenchers for his package.
But Sunak’s previous commitment to “do whatever it takes” to support people and businesses during the pandemic would only hold for so long. As such, he was clear that he faced tough choices.
Once the widely trailed 5p cut in fuel duty had been confirmed, there were two further headline grabbing announcements this lunchtime. First was the Chancellor’s decision to increase the National Insurance threshold to £12,750 (in line with income tax), saving the typical employee £330 per year from July. The Treasury resisted calls to scrap the 1.25% rise, infuriating the Opposition benches and some on his own side. But Sunak was insistent that the Government still planned to reduce taxes ahead of the next General Election in a responsible and sustainable manner. The critical phrase here was that he would “refuse to let this ambition wither and drift”.
While stressing the importance of fiscal discipline, Sunak’s so-called rabbit out of the hat was a 1p cut in the basic rate of income tax, to 19 per cent in 2024. Adamant that the move is “fully costed and fully paid for in the plans announced today”, this was Sunak’s pitch to be remembered as a tax cutting Chancellor with one eye on a General Election that could come as soon as autumn 2023, but is more likely to take place in Spring 2024. Either way, this was the clearest signal that the Government is now on an election footing.
Higher than expected tax revenues and positive economic forecasts from the Office for Budget Responsibility have given Sunak an unexpected boost to Treasury coffers, offering him some ‘headroom’ for the years ahead. This could be used to ease pressures on families and lower taxes further. However, he was keen to emphasise that the outlook for the public finances looks anything but certain – and that action taken by the UK to sanction Vladimir Putin’s regime would not be cost free.
There was some support for small business. Building on existing support packages, the Chancellor announced business rates relief worth £7 billion over the next five years. He also set out measures to help businesses boost investment, innovation, and growth – including a £1,000 increase to Employment Allowance, benefiting half a million SMEs across the UK.
In other areas, there was much more limited action. The Chancellor announced £500m for the Household Support fund to help the most vulnerable in society with rising energy bills, to be administered by local authorities from April. He hinted that the Prime Minister would bring forward further measures on this score, with a wider energy security strategy due for publication anytime now (though Sunak has reportedly pushed for a delay to give the Government more time to assess the costs of plans to develop nuclear power, solar and onshore wind).
Budgets and Spring Statements are often important as much for what they do not contain. Despite the much-vaunted ambition in the Conservative manifesto to level up the country, there was little about this today. This may be seen as a central part of the Government’s aim of retaining the support of voters who had lent their vote in the last election, particularly those in the North and Midlands. But the lack of reference to levelling up today shows how other priorities are assuming greater importance. A Government cannot do everything after all, but this remains a danger to the Conservatives’ prospects at the next election if they cannot demonstrate that they have delivered on this commitment.
When the Chancellor sat down after 27 minutes at the despatch box, the overwhelming sense was that of a politician at a crossroads. The man who for two years has been the UK’s most popular Cabinet member is unlikely to hold that title for much longer. He has been at pains to speak of ‘global factors’ beyond his control, which are in part driving the cost of living crisis. But we have had nearly 12 years of Conservative government. Sunak’s big gamble, for now, is that the combination of some limited financial support now and the promise of an income tax cut in two years’ time will be enough to keep the show on the road. The next few months will determine if that is enough.