Sunak has bought some breathing space, but the biggest challenges are still to come

•  The OBR's outlook for the coming years look inescapably bleak
•   Amid the gloom, Sunak tried to rally the troops with some classic Tory tunes
•   We can't carry on basing benefits on inflation figures from six months ago

Source - CAPX - 23/03/22

Today’s Spring Statement was a strange beast. Neither a low-key trot through the public finances, nor as dense as a Budget, but too broad to be adequately dismissed as a ‘mini-Budget’.

Striking the right tone was a challenge. A sombre opening reflected the prevailing economic and geopolitical climate, which was decidedly gloomy even before Putin rolled his tanks into Ukraine a month ago. It was noteworthy that we didn’t hear anything on energy or defence spending, two of the most hotly discussed topics over the last month – though Sunak alluded to ‘further measures’ on energy security in the weeks to come.

But amid the sobriety of the current moment, he also wanted to cheer the troops and signal to voters that he had a plan for classic Tory themes, a plan to cut taxes and put money in people’s pockets. Recent headlines about this government having raised taxes more in two years than Gordon Brown did in 10 might have struck a nerve with a Chancellor who idolises Nigel Lawson.

To that end he came armed with not just a Spring Statement, but a Tax Plan setting out, among other things, his intention to bring down the basic rate of income tax by the end of this Parliament. There was also the welcome promise of a review into how the tax system treats business investment, but no sign of rowing back on the less welcome hike in corporation tax that is coming down the line.

The fact that most of Sunak’s tax cutting was slated for the future, reflects both the political imperative of offering juicy tax cuts ahead of the next election, but also what the OBR calls the ‘unusually high uncertainty’ around the UK’s economic outlook, due mostly to factors beyond the Government’s control

To deal with the immediate cost of living crisis there was a heavily trailed 5p cut to fuel duty, which may blunt some of the pain for motorists, but does not particularly help those on low pay (who tend not to own a car).

Elsewhere, the announcement that National Insurance thresholds will rise to match income tax was rightly cheered, not least here at the Centre for Policy Studies. It was the CPS’ ‘Make Work Pay’ report that first advocated this policy back in 2018, and whose idea of a Universal Working Income the Chancellor mentioned at the despatch box. In addition to changes to the Universal Credit taper rate announced last year, raising the NI threshold will also help those moving off benefits into work keep more of their money.

Some of the other measures announced today felt rather piecemeal, however. Along with the fuel duty cut, we had a VAT cut on energy-efficiency measures like insulation and solar panels, along with an extra £500m for the Household Support Fund first announced at November’s Budget.

But it was disappointing to see nothing on uprating benefits. The fact we still index payments to inflation figures from six months ago is a flaw at the best of times, but in time of soaring inflation it feels particularly glaring. Indeed, with inflation due to average 7.4% this year, the scheduled uprating in welfare payments of 3.1% means a big effective cut for some of the least well off.

And while there were plenty of optimistic nods to future tax cuts, the Chancellor was understandably less vocal about some of the OBR’s other forecasts for the coming year.

The numbers look truly grim, even notwithstanding the huge uncertainty over the fallout from the war in Ukraine. The OBR don’t expect real average wages before taxes to return to 2021-22 levels until 2025-26, and they forecast real average wages after taxes to still be 1.1% below 2021-22 in 2026-27. Put more simply, even if we expect high inflation to tail off by 2023 the country is set for years of sustained economic pain.

For now, today’s statement has bought the Chancellor, and by extension the Government, a bit of breathing space. But with such a drastically uncertain global outlook, and such crushing pressures on household budgets, the biggest challenges are certainly still to come.