We sometimes pity Rishi Sunak, Chancellor of the Exchequer. He wants to cut taxes and free up business. But he has orthodox fiscal beliefs and a prime minister who wants to spend public money on causes Sunak deems unnecessary. Balancing these forces would always be difficult. But the economy has also been rocked by Covid-19 and now the Russian invasion of Ukraine. Yet these shocks also provided Sunak with a surprise boon, namely higher-than-expected inflation. This reduces the real value of cash-constrained spending and increases real tax revenue, primarily because thresholds are frozen in cash. Sunak therefore had money to gamble with. The story of this Spring Statement is how he used it. Essentially, he gave his backbenchers some of what they wanted. Will it work?
We can identify a fairly simple reason for doubting that he will do it for very long. According to the Office for Budget Responsibility, aggregate real household disposable income will decline by 2.2% in real terms between 2021-22 and 2022-23. This would be the largest annual decline in at least 66 years. Gross domestic product per capita is expected to grow by 1.5% between 2022 and 2023. But that will mean little for much of the population, especially the poorest, who are more vulnerable to spikes in energy prices and fuel prices. foods that better out of the members of society. It’s possible things will turn out better than that: maybe the war will end and the economy will soon return to something that seems normal. You have to doubt it. It is a time of uncertainty. But it seems likely that the external shock will persist and that domestic monetary policy will have to tighten much more than expected. (See graphics.)
The Chancellor could certainly have done more in the face of the rising cost of living. Cumulative borrowing from 2021-22 to 2025-26 is now expected to be £72bn lower than October 2021, with nearly 80% of that improvement in 2021-22 alone. Public sector net debt is also expected to decline from 96% of GDP in 2021-22 to 86% of GDP in 2025-26. In sum, Sunak plans to spend remarkably little of his windfall in the coming years: the direct effects of government decisions will be to increase cumulative borrowing by just £15bn over the next four financial years.
In order to clean up public finances post-Covid and respond to pressures to increase public spending, the government has taken policy measures which the OBR says would have raised taxes by 2.4% of GDP between 2019-20 and 2026-27 (0.9 percent). per cent through corporation tax, 0.6 per cent through the freezing of income tax thresholds, 0.6 per cent through the “health and social contribution” and the rest through other measures). Sunak has now announced offsetting cuts of just 0.5% of GDP (0.1% via the fuel tax freeze, 0.2% via the planned 1 pence reduction in the pound base rate of income tax and 0.2% via the increase in the thresholds for employees’ social security contributions).
Sunak, it is clear, is still a tax chancellor. He also saved what appears to be substantial powder for more election-fighting fireworks. But he lowered fuel taxes by 5p in the pound, but (supposedly) only for a year. He forfeited a third of the supposedly mortgaged revenue from the new levy, reducing the burden on taxpayers by 70% more than the levy would have cost them. Last but not least, he renewed the totemic promise of lower income tax rates. But it has done next to nothing to ease what is going to be far greater pressure on the cost of living than imagined a month ago, especially for the poorest people, whose benefits are fixed in cash until the next increase. Moreover, what he introduced in February was already too little and poorly distributed among households.
The policy is to support the marginal voter and ease the burden of the unpopular tax on health and social care. But it leaves most of the hit to living standards unaddressed and the most vulnerable are markedly worse off. It is difficult to find a good justification for this.
Will it at least be good politics? I suspect not. Yes, he will receive cheers from the supporters today. But unless the pressure on living standards turns out to be lower than expected, the general mood will remain gloomy.
Sunak, people may think, has done too little. His promises to reorganize the tax system, to relaunch growth, will seem miraculous. He should have opted for an exceptional tax and distributed more of it to those most affected. He chose a more conventional, albeit still highly political, path. He may have to do a lot more very soon.
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