The Young Fabians Economy & Finance Network respond to last week’s Spring Statement, and consider whether the Chancellor has done enough to help those suffering most from the Cost of Living Crisis.
What is the Spring Statement?
The Spring Statement is one of the two statements the Treasury makes each year. The Spring Statement is the so-called “Mini-budget”, following on from the full Autumn budget. It gives the government an opportunity to provide an update on the economy, and allows for some adjustments and policy announcements to be made.
What were the key announcements?
- The income threshold when people start paying National Insurance will rise to £12,570
- Fuel duty will be cut by 5p per litre until March 2023
- The Employment Allowance, which gives relief to smaller businesses' National Insurance payments, will increase from £4,000 to £5,000
- Homeowners installing energy-efficient materials such as solar panels, heat pumps, or insulation will see VAT cut on these items from 5% to zero for five years
- Local authorities will get another £500m for the Household Support Fund, creating a £1bn fund to help vulnerable households with rising living costs
- A cut to the basic rate of income tax from 20p to 19p in the pound before the end of this Parliament
The full announcements can be found on GOV.UK.
YF Economy & Finance response:
The UK economy has gone through a tumultuous few years due to Brexit, the pandemic, and now the illegal invasion of Ukraine. This is reflected by the Office for Budget Responsibility cutting the UK’s growth forecast to 3.8% this year - a sharp cut from its previous prediction of 6.0%. Therefore, you would have hoped for an aggressive Spring Statement to assist the UK economy, and its most vulnerable people.
However, this Spring Statement fell well and truly into the ‘not fit for purpose’ bucket. This sentiment is echoed by the IFS’s Paul Johnson, who says;
"If he [Sunak] wants to be remembered as a tax reforming chancellor, so far he is headed in the wrong direction. The combination of increased NI rates and a reduced income tax rate will make the tax system both less equitable and less efficient."
The Resolution Foundation says that the Chancellor seriously misjudged the public mood because he made the political choice to focus on rebuilding his tax-cutting credentials within the Conservative Party, rather than support the poorest in our society who are being squeezed. This is simply unacceptable as we head into the biggest living standards fall on record. The gains of this tax cut are wiped out by previously announced tax rises. In 2024-25, when the proposed income tax cut comes into effect, 27 million out of the 31 million people in work will pay more Income Tax and National Insurance as a result of personal tax changes announced by the Chancellor. It is not serious policy making to promise future tax cuts whilst allowing benefits to fall today as prices soar. Nor is it sensible to celebrate a 5p fuel duty cut following last year’s 40p increase in petrol prices.
The Chancellor says, "It's impossible to fully protect people" from rising inflation. That may be so. However, what you must do in this situation is prioritise protecting the most vulnerable. The Chancellor did not do this.
The major additional help announced was the increase in the threshold over which you start paying National Insurance to £12,570. Only those who work pay National Insurance, and so this is a lazy solution because the cash gains are greatest for those on middle and higher incomes (only 1/3 of the benefit goes to the bottom half). This is another poorly targeted intervention by the Chancellor.
To add insult to injury, even lower income households that do benefit will often benefit by less. This is because Universal Credit (UC) is means-tested on the basis of post-tax income. For many (but not all) UC recipients the result is that for each £1 of tax cut, they see a 55p fall in benefits. Cuts to income taxes is an exceptionally bad way to help the poor.
There are around 5.5 million economically inactive households across the UK and over 11 million retired households. These households will see bills soar but will gain nothing from this tax cut. The OBR forecast that energy bills will rise by 40% again in October, if wholesale gas prices remain at the same level they are now. To compensate, the Chancellor needed to uplift social security payments in line with inflation. The fact he didn’t shows where his priorities lie. This failure equates to a real terms cut in social security benefit of c.£12bn.
No wonder Sunak looked under pressure and nervous at the recent Treasury Select Committee meeting.
Labour MP, Siobhain McDonagh threw the hardest punches, noting that: public sector net debt is highest since early 1960s; real living standards to fall by 2.2% - the worst since the 1950s; and the tax burden rising to the highest level since the 1940s. She then questioned the Chancellor whether it was good economic management to propose a tax cut and other fiscal policy decisions around the General Election cycle.
The Chancellor could not answer.