Yesterday's Spring Statement saw the Chancellor make bold narrative pledges, with promises of a “stronger, more secure economy” and help for families with the cost of living. He positioned the Spring Statement to address the issue of security, both in relation to Ukraine and in the UK with regards to economic growth.
The Chancellor has faced intense pressure from all directions - to help more on bills for households and businesses, to increase the pay of public sector workers, to heed to the low tax ideology of his party, and to demonstrate a fiscal approach that is credible and popular at the same time.
One of the major impacts on living standards and the public finances has been inflation - which has soared from almost zero just over a year ago to 6.2%, the highest rate since 1992, and the OBR expects it to average 7.4% this year. The ONS said the biggest factors driving the recent surge are the soaring global prices for energy, petrol, food and household goods. The official forecasts also showed that the Government has the smallest budget deficit for 25 years, but Sunak has only used some of this money to help households facing soaring household bills, and instead highlighted the importance of more resilient public finances.
Sunak announced his support for the cost of living crisis being: a fuel duty cut of 5p per litre until next March, 0% VAT for homeowners installing solar panels, heat pumps and insulation, and the household support fund for poorest doubled to £1bn.
Sunak’s tax changes include those to National Insurance, the employment allowance changes for SMEs, and the basic rate of income tax will be cut from 20p to 19p in 2024.
Macro updates (which are a mixed set of forecasts):
- The economy is forecast to grow by 3.8% - a sharp cut from its previous prediction of 6.0%.
- The inflation rate is 6.2% and is likely to average 7.4% this year.
- The unemployment rate, which is currently at 3.9%, is now predicted to be lower.
- Borrowing as a percentage of GDP is expected to fall from 83.5% of GDP in 2022/23 to 79.8% in 2026/27.
- The Government is forecast to spend £83bn on debt interest in the next financial year, the highest on record.
Personal finances/cost of living
- National Insurance – The 1.25% rate increase has been maintained and will come into effect in April 2022, however the income threshold for payments has been increased by £3,000, instead of £300, to £12,570 from July 2022. The threshold change equalises the national insurance contributions (NICs) threshold with the personal income tax allowance.
- Basic Rate Income Tax - The basic rate will drop from 20% to 19% from April 2024. In total the tax cut is worth £5 billion.
- Household Support Fund – An additional £500 million of funding to be distributed from April 2022. Local authorities in England will receive the majority of this funding.
- Fuel duty - To be cut by 5p per litre. This cut represents savings for households and businesses worth around £2.4 billion in 2022-23.
- VAT relief for energy saving materials - Homeowners with energy saving devices such as solar panels, will no longer pay 5% VAT, this will be reduced to 0%.
- Small business Employment Allowance - Will increase from April 2022, meaning eligible employers will be able to reduce their employer NICs bills by up to £5,000 per year – a tax cut worth up to £1,000 per employer. This measure will benefit around 495,000 businesses.
- Green reliefs for business rates - The Government is bringing forward the implementation of business rate exemptions for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible low-carbon heat networks with their own rates bill. Both will now take effect from April 2022.
- R&D tax relief reform - R&D tax reliefs would be reformed to include some cloud and data costs and refocus support on R&D carried out in the UK. From April 2023, all cloud computing costs associated with R&D, including storage, will qualify for relief.
- Tax credit reform – The Chancellor said credits will be reformed. He will speak to businesses over the Summer and announce the reforms in the Autumn.
- Annual Investment Allowance A temporary £1 million level of the Annual Investment Allowance has been extended to 31 March 2023. This allows businesses to deduct in-year the full value (100%) of qualifying plant and machinery investment, up to a limit of £200,000.
- Business rates discount The Chancellor confirmed previously announced measures to discount business rates for retail, hospitality and leisure businesses by 50% on a bill up to £110,000.
Public sector support
- NHS efficiency - The NHS efficiency target is increased 1.1% to 2.2% a year. This will be used to free up £4.75 billion to fund NHS priority areas over the next three years.
- Business rates – the government will reduce the burden of business rates in England by over £7 billion over the next five years.
- Levelling Up A second round of funding was announced to provide support for local infrastructure projects, in total the fund provides £4.8 billion.
- Public Sector Fraud Authority An additional £48.8 million of funding over the next 3 years to support the creation of a new Public Sector Fraud Authority and enhance counter-fraud work.
This analysis was created by our UK PR partner Hill+Knowlton Strategies.