Rishi Sunak has been Chancellor of the UK for just two years, but has faced a coronavirus crisis and now Russia’s invasion of Ukraine – sparking a cost of living crisis at home.
The chancellor had hoped to move towards a single budget a year with a spring statement that updated only economic and public financial forecasts and put forward some medium-term ideas for tax changes that would require formal consultation.
Even a few weeks ago, that was Sunak’s strategy for Wednesday’s statement, but the war in Ukraine has disrupted that. Instead, he will now face significantly altered economic forecasts and tremendous pressure to isolate British families from the inflationary forces unleashed by the war.
Here are five things to watch out for in the Spring Statement.
The stagflationary shock
The Office of Fiscal Responsibility has learned from the fact that it did not use up-to-date data in the October budget. This time, it closed its forecast on March 2, taking into account the movements in the financial and commodity markets in the first week of the Russian invasion. The figures will be an accurate attempt to describe the economic effects of the crisis.
In practice, the effect will be a much higher inflation forecast than the 5 percent peak envisioned by the fiscal watchdog in October; a peak is now expected to be much closer to 10 percent, with the exact figure depending on the gas and electricity price forecasts used by the OBR.
This is expected to put serious pressure on household incomes, causing real growth to fall significantly from the 6.5 percent for 2022 projected in October to nearly 4 percent. Some of this change reflects stronger economic performance last year, leaving less room for recovery, but it also reflects the financial pain that households will suffer.
However, the fiscal watchdog will say wage growth will be stronger and unemployment has been better than expected, so the economy’s cash size — including domestic inflation and growth — will be revised higher.
Improved public finances
Officials strongly suggest that government borrowing forecasts will improve despite low growth and high inflation.
When the cash size of the economy is greater, tax revenues increase and this has been the story so far in the 2021-2022 fiscal year. The high government revenues have so far outweighed the higher cost of repaying the government debt.
Sunak’s loan rule is to balance the current budget – net of net investment – within three years, and the Chancellor has taken care of this with £25bn left in his October budget. This week’s forecast is likely to be significantly healthier. Goldman Sachs estimates he will have between £20bn and £50bn of additional headroom by this test, enabling the chancellor to mitigate the cost of living crisis.
Help for families in need
With public finances looking stronger, the Chancellor will struggle not to offer further assistance with the rising cost of living on top of February’s package of £150 council tax cuts for some households and £200 loans to help cut energy bills for all households this winter. to lower .
Sunak says he will “assist people” in the same way he did during the pandemic, and while the Treasury has resisted suggestions it will do more on Wednesday, it regularly exceeded expectations it tried to set in such statements during the Covid crisis and earlier this year.
Therefore, the chancellor is expected to follow Italy, France and Germany in lowering road fuel taxes to lower prices at the pump a bit, perhaps by 5 cents a litre.
He is under enormous pressure to acknowledge that inflation is much higher than when the benefit hike was announced last fall. To address this, he could bring forward increases in pensions and state benefits to next month instead of waiting to do so in April 2023.
Contrary to likely temporary support, Sunak is resisting pressure to cancel his planned increase in national insurance in April, arguing that it is intended to pay for long-term improvements in health and social care. Sunak wants to become chancellor of tax cuts and can make a down payment on this by lowering income tax in the spring settlement, for example by increasing the tax deduction or the threshold at which people will pay national insurance.
Little support for government services
Unlike state benefits, which are increased each year to account for inflation, the Treasury prepares government spending plans for government departments in cash for three years at a time. The most recent spending review, last October, set budgets for 2022-23 to 2024-25.
The Institute for Fiscal Studies think tank has estimated that higher-than-expected inflation has already wiped out a quarter of the government spending increase planned in October, and that the chancellor would need to spend £10 billion a year to protect public sector workers from a tight pay gap.
Sunak is extremely reluctant to reopen these plans just six months after they were made and is expected to dangle almost all government departments as they have to fund higher costs with improved performance.
The defense budget seems likely to be ramped up a bit as a result of aid to Ukraine and the additional cost of deploying troops to bolster the security of NATO’s Eastern European countries.
Go for growth
At the Mais lecture last month, Sunak prioritized measures that he believed would boost the economy’s long-term growth. With public investment already high, he emphasized his desire to change the tax system to give private companies more incentives to invest and grow.
An almost certainty in the Spring Declaration is that the Chancellor will outline options and consultations to further these ambitions. He will propose the UK move more permanently to a continental European form of corporate tax with higher rates but larger investment deductions. The chancellor is also expected to pay attention to waste in research and development tax credits, especially for smaller companies, which he wants to streamline.
The only sting in the tail for companies, especially those in the North Sea, that are doing well as global oil and gas prices soar, is that he may be trying to change the tax regime on their profits again. This last changed in 2016, when oil prices were expected to remain persistently low and the chancellor will be tempted to monetize this sector, which has risen as a result of the war in Ukraine.
This post Improved public finances put pressure on Sunak to ease the cost of living
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