Only three weeks ago the 2022 Spring Statement was set to be, as envisioned, a ‘mini’ fiscal event allowing the Chancellor an opportunity to provide an update on the state of the economy and announce any minor policy adjustments, without making significant tax or spending changes usually reserved for the Budget. However, the world is now in many ways a different place than it was three weeks ago, and this includes a multitude of implications for the UK’s economic outlook.
Although peace talks between Ukraine and Russia seem to be making progress, the prospect of a drawn out or even spreading conflict may also prompt Rishi Sunak to dedicate additional funding to defence and refugee support.
Russia’s invasion of Ukraine and the subsequent sanctions have also exacerbated an already serious cost of living crunch. Earlier this month, Cebr Deputy Chairman Douglas McWilliams estimated that the conflict will cost each British household £1,259 in 2022 via higher prices for energy, food and other essentials. The concerns are also reflected in the latest reading of the YouGov/Cebr Consumer Confidence Index which in February saw its household finances component hit an all-time low.
Although macroeconomic conditions have certainly deteriorated, the news for the Chancellor is not all bad. The spike in inflation and a tight labour market have seen wage growth pick up. This, combined with a strong post-Omicron bounce back at the start of the year, will see the government in a stronger than anticipated fiscal position. This is especially true given the Office for Budget Responsibility’s consistently over-pessimistic forecasts. In the ten months of the 2021/22 financial year for which we have data, the OBR’s forecast has overshot the actual public sector net borrowing figure nine times. For the financial year as a whole OBR’s latest forecast point to borrowing of £165.2bn, compared to Cebr’s forecast of £162.6bn – a gap of £2.6bn.
Given the mounting cost of living crisis, the deteriorated economic outlook, and the fiscal leeway, the Chancellor should use the Spring Statement as an opportunity to protect household finances (especially for poorer households) and reverse course on planned tax hikes which were drawn up under a set of assumptions which have already been proven false.
In terms of protecting household finances, further action on energy prices seems an obvious choice. The greater than expected fiscal headroom means the Chancellor is in a position to make the council tax rebates and energy bill credits which are already in place more generous. Poorest households should be provided with added targeted support via higher Universal Credit, e.g. returning to the £20 a week uplift seen during the pandemic.
On tax increases, it would make sense to reconsider both the tax threshold freeze and the National Insurance hike, but especially the former. The threshold freeze was announced at a time when inflation stood at 0.7%. In January it was up to 5.5% and Cebr expects a further rise to 8.2% by April. As inflation feeds into wages, this means that what was meant to be a £8.2bn tax hike is now set to raise £20bn, assuming wage growth of around 4%. Given that the inflationary forecasts on which the freeze was based have been surpassed many times over, reversing the policy would go a long way in helping households amid the cost of living crisis, while also helping to set the right incentives within the labour market.
The case for scrapping the National Insurance hike is less strong, but it is still there. The hike would hit households and businesses at the same time as their expenditure is already increasing drastically. For some businesses it comes at a time when they’ve finally recovered from pandemic losses. Lastly, it also makes the UK a less attractive place to work, just when the country needs to attract workers either from abroad or out of economic inactivity, which has risen steadily during the pandemic.
Cebr will be updating its fiscal forecasts on 23 March in order to account for any relevant changes announced in the Spring Statement. At present we are anticipating public sector net borrowing to stand at £78bn in 2022/23, compared to OBR’s forecast of £83bn as higher borrowing due to lower growth is more than offset by higher receipts. However, this year’s Spring Statement is set to contain several significant announcements, which may mean a notable change to our forecasts.
 The figure takes the actual values for the first ten months of the financial year and sums it with OBR’s forecasts for February and March 2022.