Spring Statement 2022 — an economic analysis | Chris Davies

Executive Summary

• National Debt will continue to rise and exceed £2.5Trn;

• Debt servicing is estimated to cost £83Bn – a fourfold increase;

• Inflation (any index) will outstrip economic growth and average wage increases making 2022 a year of stagflation;

• As 2023 growth forecast now below 2%, that is forecast to remain the case throughout that year too;

• Increasing interest rates now will not mitigate inflation. They should have been increased in early 2021 and Quantitative Easing reduced in size and duration by the Bank of England’s Monetary Policy Committee;

• Energy prices are spiralling dragging millions into fuel poverty. Lack of energy independence has unduly exposed the UK to volatile wholesale spot prices for oil and gas;

• Freezing of personal allowances on income tax exacerbates cost of living crisis;

• National Insurance increases are a jobs tax and disincentivise business growth;

• State pension increases way behind inflation – pensioners are likely to be as much as 6% worse off by quarter 4 based on OBR inflation forecast;

• Fuel duty reduction modest and essentially absorbed as prices increased in advance (and oil price ended up again from last week);

Background 

2 years ago, Rishi Sunak had the Midas touch. His popularity both within the Conservative Party faithful and the country at large was irrepressible and he was openly touted as the candidate head and shoulders ahead in the race to succeed Boris Johnson.

After this week’s Spring Statement (the budget that wasn’t a budget) and his subsequent disastrous media round, Midas has turned to somewhere between Canute and the Emperor who has no clothes.

Along with his Instagram account and his wife’s £12M dividend from Infosys, who continue “business as usual” trading in their Moscow office, Sunak would do well to keep his head buried in the red ink of inflation, energy hikes and resulting falling living standards that are the perfect alchemy for electoral distress for the government at the local elections in May.

Accepting:

• The pandemic occurred;

• Government action was well intended;

• Russia invaded Ukraine;

• The Bank of England Monetary Policy Committee (“MPC”) is not fit for purpose for mitigating inflation;

Sunak, Johnson and the Conservative & Unionist Party at large, who are approaching 12 years in office, must accept significant culpability for fiscal incompetence that has contributed to the perfect storm of falling standards of living and an increasing tax burden on a worst in 80 year scale.

No short term feel good factor

Fuel duty was reduced by 5p a litre for 12 months but prices had been inflated in anticipation. Sunak’s photo opportunity outside a South London Sainsbury’s was ruined by 2 realities:

• The car belonged to a member of Sainsbury’s staff;

• He put the fuel in before 18:00 when the fuel duty reduction kicked in.

The National Insurance threshold was increased in line with basic rate income tax but the 1.25% increase for employees, employers and on shareholders’ dividends, for a business owner, means they pay 3 times. 

The party of small business has also reversed Corporation Tax cuts from 2023/24 and replaced them with an increase from 19% to 25%.

Medium term, things can only get better?

• Pensioners get the triple lock restored: next year.

• Basic rate income tax will reduce 1p to 19p before the end of the parliamentary term.

• The “Tax Plan” of this “low tax” Chancellor is to increase taxation to an 80 year high during the lifetime of this parliament.

Let’s dive deeper into the economic metrics data that emerged this week to benchmark the fitness for purpose of the Chancellor’s proposals.

Inflation (Source: Office for National Statistics)

• Consumer Price Index (“CPI”) inflation rose from 5.5% to 6.2%, more than 3 times the MPC target;

• Retail Price Index (“RPI”) inflation rose from 7.8% to 8.2%;

• House Price inflation fell to 9.6%;

The Office for Budget Responsibility (“OBR”) whose record for forecasting is as reliable as SAGE, predicted CPI inflation will peak at 8.7% in quarter 4. This compares to a high of 4.4% predicted at the time of the budget in October 2021.

Energy bill hikes will only kick in from 1st April and wholesale fuel prices continue to spiral, rendering the likelihood of a further raising of the energy price cap from just over £2,000 to nearer £2,750 in October increasingly feasible.

Real terms inflation is estimated to be double the CPI rate. On that basis 12.4% currently and assuming the OBR are right (unlikely), it would be 17.4% in quarter 4.

Economic growth (source: OBR/ONS)

• Growth forecast was revised down from 6% to 3.8%. OECD forecast is 4.9% but that is certain to be revised down to below 3.5%;

• Given the inflationary numbers, the economy is now into a potentially lengthy period of stagflation, (where inflation outpaces economic growth);

• Average wage increases are at 3.8%. Month on month, net disposable income will fall in real terms until this figure exceeds inflation. This is unlikely to happen before late 2024.

National Debt (source: OBR)

• Government borrowing for 2021/22 was better than expected at £127bn compared to the OBR’s previous prediction of £183bn;

• Borrowing is expected to fall to £99bn in 2022/23 but this is higher than the £83bn predicted at October’s Budget.

• Borrowing as a percentage of GDP will be 5.4% in 2022/23 and 3.9% in 2023/24, within the Chancellor’s fiscal rules.

• Debt servicing costs will be the highest on record at £83bn in 2022/23.

• Underlying debt as a share of GDP will fall from 83.5pc in 2022/23 to 79.8pc in 2026/27.

Against that backdrop, despite public sector borrowing undershooting relative to OBR forecasts (around £25Bn), the “low tax” Chancellor delivered a tax (raising) plan for the remainder of the parliamentary term. 

Where appropriate I have signposted what had already been announced in last October‘s budget and what has been augmented in the Spring Statement. The devil really is in the detail.

Personal Taxation – principal changes

Income Tax – already announced in October 2021 budget

• The personal allowance for 2022/23 will remain at £12,570 and the basic rate band will similarly be frozen at £37,700 making the higher rate threshold (the sum of the two) an unchanged £50,270;

• These freezes, which are set to continue until April 2026, in fact represent a real-terms tax increase, given that the Bank of England forecasts that CPI inflation in April will be 8%;

• Dividend tax rates will increase by 1.25% from 2022/23, taking them to between 8.75% (basic) and 39.35% (additional rate). Both the dividend allowance and the personal savings allowance are unchanged.

Income Tax – announced in Spring Statement

• The basic rate of income tax will be reduced to 19% from 2024/25. The cut will apply to non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland and also to the savings basic rate, which applies to savings income for taxpayers across the UK.

National Insurance – already announced in October 2021 budget

• The rates for all National Insurance contributions (“NICs”) under Class 1 (employed) and Class 4 (self-employed) will rise by 1.25% for 2022/23 only, before dropping back to 2021/22 levels after that;

• The separate 1.25% Health and Social Security Levy will then take effect from 6 April 2023. Unlike the position with NICs, employees and the self-employed over state pension age (currently 66) will be subject to the new levy;

• The secondary threshold for employer’s Class 1 NICs will increase by 3.3%, broadly in line with inflation to September 2021. The upper earnings limit (for employees) and upper profits limit (for the self-employed) will be frozen at £50,270, matching the unchanged UK higher rate income tax threshold outside Scotland;

• The Class 2 NIC rate (pension contributions for the self employed) for 2022/23 will be £3.15 per week.

National Insurance – announced in Spring Statement

• The primary threshold for Class 1 NICs will increase from £190 a week (£9,880 a year) to £242 a week (£12,570 a year) from 6 July 2022, bringing it in line with the frozen personal allowance;

• For company directors, who are subject to special rules, the equivalent annual amount from July will be £11,908. From 2023/24, all employees will share the same £12,570 annual threshold. The maximum potential Class 1 employee NICs saving in 2022/23 is £269;

• For the self-employed, the lower profits limit will increase from £9,880 to £11,908 in 2022/23, rising to £12,570 in 2023/24. Class 2 NICs will not be payable if profits are below these limits. The maximum potential Class 4 NICs saving in 2022/23 is £208;

• There is no change to the Class 1 secondary threshold (employer), but the employment allowance will be raised from £4,000 to £5,000 for 2022/23 onwards.

Value Added Tax (“VAT”)

• Eligibility for VAT relief on energy saving materials will be expanded and the VAT rate reduced to zero for five years from 1 April 2022;

• Examples include solar infrastructure , ground and air source heat pumps;

• These changes do not apply to Northern Ireland;

• The reduced 12.5% VAT rate for hospitality, holiday accommodation and attractions ends on 31st March 2022, when the rate will revert to the 20% standard rate.

Fuel Duty

• The rate of fuel duty on petrol and diesel reduced by 5p a litre for 12 months from 18:00 on 23rd March.

Council Tax

• Around 80% of households (bands A to D) will receive a £150 rebate to assist with energy bill increases.

Business Taxation – principal changes

Corporation Tax

• Unchanged but basic rate will increase from 19% to 26% from 2023/24.

Conclusion

The Spring Statement has been described as everything from “sophistry” to “underwhelming” by commentators.

My view is it is most definitely not small c conservatism nor is Rishi Sunak a “low tax” Chancellor.

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