The Week 25 March, 2022

Wednesday was the Spring Statement, and the last fiscal event ahead of energy price and National Insurance (NI) rises next month for the Chancellor to take further steps to alleviate the cost of living crisis.

“Uncertainty” was one of the watchwords of the OBR’s ‘Economic and fiscal outlook’, unsurprisingly given the global situation, but one thing we can be certain of: this is going to be a very tough year for low- to middle-income families. While there is some good news for the public finances — higher tax receipts, lower departmental spending, and faster falls in borrowing than expected — it’s grim for personal finances. Inflation is now expected to peak at 8.7% in Q4.

Real incomes and consumption are set to decline, and in turn GDP growth this year will fall to 3.8% from the 6% expected last October. With earnings falling and taxes rising in April, real living standards will drop by 2.2% in 2022-3 — their largest decrease since records began in the late 1950s.

Inflation will also impact the public finances. While overall borrowing has declined modestly, inflation will propel debt interest costs to a record high of ￡83 billion this year (a doubling from October forecasts). To put that in context, that’s the same as the entire Department for Education budget, or five times the Home Office’s budget.

The inflationary squeeze will also have a big effect on public spending. Departmental settlements agreed?last Autumn?in cash terms now look far less generous with average growth across the spending review period (2021-2?to 2024-5) downgraded from 3.3% to 2.9%. For departments whose spending is driven largely by the salaries of front line staff (looking at you Health, Education and DWP), difficult negotiations over pay await. It’s also worth noting that the same departments also have high energy use due to their extensive estate, and will therefore have to accommodate soaring energy prices.

But the biggest question ahead of the Spring Statement was whether the Chancellor would introduce policies to help mitigate the cost of living crisis, especially for the poorest households. Three main policies were?announced: increasing the personal allowance threshold for NI to ￡12,570, cutting fuel duty by 5p per litre for the next 12 months, and doubling the local authority distributed Household Support Fund announced in February from ￡500 million to ￡1 billion.

Whilst each of these policies makes a positive contribution to the cost of living, it is right to ask whether, taken together, they match the scale of the crisis, or are sufficiently targeted to make a difference to the most vulnerable.

First up, the increased NI personal allowance. This is a sensible move. The earnings of?2.4 million?workers who currently pay National Insurance but not income tax (which has a higher personal allowance) will now be tax free. The change will mean a typical employee saves roughly ￡330 a year, and it contributes to simplifying the tax system by aligning the thresholds for both NI and income tax. It will also help those who are self-employed, since the “Lower Profits Limit” is being?increased?to the same amount. For 70%?of taxpayers, the Chancellor told us, this will more than?offset?the National Insurance increase coming in April.

What it will not do, however, is help those out of work or earning less than the current NI threshold. That includes the more than 2 million people who are reliant on benefits due to long-term sickness or disability and are not expected to work.

Similarly, a 5p cut to fuel duty will provide a little relief for drivers, but fuel accounts for only small proportion of expenditure for those struggling the most — the poorest decile of households?spend?￡6.20 a week on petrol and diesel. And many of the poorest households won't have a car, particularly those living in cities. It is also worth bearing in mind that petrol now costs?more than 40p more?per litre than at the beginning of the year.

Finally, the Chancellor’s decision to double the Household Support Fund. This is the one measure focused on those who are struggling the most. The obvious — and roundly called for, including by?Reform?— option would have been to increase the rate at which benefits are uprated in April to better reflect current inflation (uprating is decided the previous September, when CPI was 3.1%). The IFS calculated that uprating benefits and pension credit by 6% (which was the previous inflation forecast) would cost?￡3 billion, showing how inadequate the additional ￡500 million is.

Using uprating would also have meant money going directly into the pockets of the?poorest families, rather than relying on local authority schemes. The Chancellor?reasons?that “Local authorities are best placed to help those in need in their local areas”, and certainly if you want a discretionary scheme they are better placed to administer it than central government, but they're not better placed than individual claimants themselves.

The ‘rabbit’ was an odd announcement, two years out, to cut the basic rate of income tax from 20% to 19%. To state the obvious, a tax cut in 2024 will do nothing to ease the current cost of living crisis, not that the Chancellor suggested it would. Worse, it makes for an even less fair tax system. The Government is cutting income tax — paid by a broader base and including earnings derived from pensions and investments — while increasing NI — paid on earnings from working-age workers. It was, obviously, designed as red meat for tax-cutting backbenchers, but by 2024-5, almost?9 in every 10 workers?will still pay more tax than they currently do. Remember the four-year income tax threshold freeze means millions of people paying more tax.?

Our overall verdict. The Chancellor had a tough gig, he's right to be concerned with the need to stabilise the finances?— remember the debt interest payments. But he should have done more for the poorest households for whom there is almost nothing by way of additional support. The JRF?estimates?a further 600,000 people will be pulled into poverty despite the measures taken, demonstrating just how inadequate they are.?