Image: Parliament TV
The Chancellor gave his Spring Statement this lunchtime, announcing an increase to the National Insurance threshold and cuts to fuel duty against a backdrop that will see the biggest fall in living standards since records began. However, it has left many MPs asking whether money does indeed grow on trees?
A gloomy forecast:
Facing one of the biggest reductions in living standards in a generation, the Chancellor was in combat mode. Facing significant pressures caused in part by the ongoing war in Ukraine, he said that his statement builds a “stronger, more secure economy for the UK.” Highlighting the moral responsibility to support the Ukraine through sanctions imposed on Russia by the UK and allies, he wanted that they are not “cost free” for the UK population.
“I can confirm that before the end of this Parliament that the basic rate of income tax will be cut from 20 to 19p in the pound.”
Chancellor, Rishi Sunak
In one of the most powerful statements of the speech, he said, “we must show the world that freedom and democracy are the best route to peace prosperity and happiness.”
With unusually high uncertainty for economic outlook, the independent OBR forecast downgraded UK growth to 3.8% this year. Ahead of his statement inflation figures were published at 6.2%, lower than the US and broadly the same as the Euro zone. The Chancellor told the House of Commons that inflation is predicted to be 7.4% average this year.
In what was the only positive announcement, Sunak hailed that unemployment has bucked the trend and is projected to be lower in every year of the forecast.
However, the cost of borrowing is expected to rise with the Treasury spending £83 billion on debt interest – four times the amount spent last year. He however warned that more borrowing is not cost or risk free.
Helping people with the cost-of-living:
Announcing measures to help struggling families, the Chancellor announced three key measures to support struggling families with the cost-of-living.
- Motorists:
- To cheers on the backbenchers, fuel duty will be cut by 5p per litre from 6pm tonight worth £5 billion, until March next year.
- Energy:
- Following criticism that the Prime Minister had promised a VAT reduction on energy during the Brexit campaign, the Chancellor was playing for the home team.
- Suggesting that only some energy efficiency items – including solar panels and insulation comply for a 5% VAT rate, he announced that homeowners will no longer pay 5% VAT – they will pay zero.
- In a further dig at the EU, the Government promised to abolish all red tape “imposed” by the EU.
- Citing problems caused by the Northern Ireland, this announcement will not apply to Northern Ireland and will raise it with the European Commission as a matter of urgency – instead, the Northern Ireland Government will receive an increase in their Barnet allocation to compensate
- Household support fund:
- From April, the Chancellor is doubling the household support fund to £1 billion with £500million of new funding for local authorities. This fund was set up last year to support vulnerable households with essentials over the winter.
Reforming the tax system:
As a self-professed ‘low-tax Conservative’ the Chancellor reiterated his overall ambition to reduce taxes by the end of this Parliament, in a way that is responsible and sustainable.
He has today published a tax plan (twelve whole pages!) outlining his less than revolutionary plan to reform the tax system. Outlining his dedication towards prudence, he stressed that the UK needs to be disciplined – carefully considering the macro-economic outlook. He hopes that his new tax plan “will build a stronger economy.”
This new plan also came in three parts:
- Support families with the cost of living
- Despite calls for the scrapping of increases to national insurance to pay for NHS and social care, the Chancellor defended his new dedicated funding source for the NHS, “with every penny going to health and care”
- To loud cheers and waving of order papers in the Commons, Sunak announced an increase to the national insurance threshold from the planned £300 this year to the full £3000 – equalising the NIC and income tax thresholds.
- The Chancellor claimed this to be a £6 billion tax cut for 30 million people and “the largest personal tax cut in a decade”.
- Quoting the Institute for Fiscal Studies and the Centre for Policy Studies, Sunak called it the “best way” to help with the cost of living. However, IFS Director Paul Johnson has already tweeted that there is no justification for cutting income tax while raising national insurance.
- People, capital, ideas
- People:
- Admitting the lack adult technical skills, a third lower than the OECD average, he said the Government will consider whether the current tax system is doing enough to incentivise training.
- People:
- Ideas:
- He stressed the UK has a lower rate of innovation to comparable economies, where R&D spend is less than half the OECD average
- He committed to reforming R&D tax credits and expanding the generosity of the relief to include new technologies including “the cloud”.
- Capital:
- In the Autumn Budget, the Government will cut taxes on business investment.
- Support for small businesses
- Pointing to the 50% business rate discount up to £150,000 for businesses in sectors hit hardest by the pandemic, he said the Government has supported small businesses through difficult times.
- From April, the employment allowance will increase to £5000 – helping half a million businesses.
People are worried sick:
This is always a difficult job for a Shadow Chancellor – the public are never really that interested in what you have to say and the press is highly unlikely to broadcast much more than a soundbite. Not much to clip here.
Predictably, Reeves focused her ‘attack’ on the Chancellor failing to announce a windfall tax on energy companies and a failure to scrap his national insurance hike. She said “people are worried sick” about the cost-of-living crisis. She said “his choices are making the cost of living crisis harder.”
Reeves continued “despite the Chancellor’s reluctant measures, he is still taking money out of people’s pockets through an increase in national insurance.” Where is the increase in tax for the wealthiest, she asked.
“The Chancellor has made the wrong choices” Reeves concluded.
The most important line the Shadow Chancellor focused on, which resonates well with the public is the £11.8 billion lost to fraud. In an excellent analogy, Reeves claimed that this was three times more than the Conservatives lost at Black Wednesday. She called on the National Crime Agency to investigate, “taxpayers want their money back.”
As the Chancellor woos backbench Conservative MPs in time for a potential leadership election, she suggested that the Conservative Party had become the party of tax as they had become the party of low growth. In a killer line that may come back to haunt the Chancellor, Reeves said “the truth is he’s Ted Heath with an Instagram account.”
Frankly, the drawn-out ‘Alice in Sunakland’ analogy simply flopped outside the bubble.
The final shake of the tree:
In addition to the equalisation of personal tax thresholds, the Chancellor rounded up his statement by making a commitment of jam tomorrow. MPs were audibly on the edge of their seats. How could the Chancellor go any further without raiding his daughter’s piggy banks? Citing the OBR forecast that by 2024 inflation is expected to be under control, debt falling sustainably and the economy growing – Sunak confirmed the biggest shake of the tree since Mrs May c.2017 “I can confirm that before the end of this Parliament that the basic rate of income tax will be cut from 20 to 19p in the pound. A £5 billion tax cut for 30 million people.”
Reminiscent of Geoff Hurst scoring the final goal in extra time, the crowd went wild. However, when the euphoria dies down – MPs are going to have to think about how this will be paid for with a national debt hovering around £2.3 trillion. Time to sober up.