Improved public finances are putting pressure on Sunak to ease the cost of living crisis

Rishi Sunak has been Britain’s Chancellor for just under two years but has had to deal with a coronavirus crisis and now Russia’s invasion of Ukraine fueling a cost of living crisis at home.

The chancellor had hoped to move towards one budget per year with a spring declaration that simply updated forecasts for the economy and public finances and proposed some medium-term ideas for tax changes that required formal consultation.

That was Sunak’s strategy for Wednesday’s statement a few weeks ago, but the war in Ukraine has disrupted it. Instead, he now faces significantly different economic forecasts and enormous pressure to protect British families from the inflationary forces unleashed by the war.

Here are five things to look for in the spring statement.

The stagflation shock

The Office for Budgetary Responsibility has learned from this his failure current data to be used in the October budget. This time he closed his forecast on March 2, taking into account movements in financial and commodity markets in the first week of the Russian invasion. The numbers will be an accurate attempt to describe the economic impact of the crisis.

In practical terms, the impact will be a much higher inflation forecast than the 5 percent spike the fiscal watchdog is proposing intended in October; now a spike is expected to be much closer to 10 percent, with the exact number depending on the gas and electricity price forecasts the OBR adopts.

This will severely depress household incomes and bring real growth significantly lower to closer to 4 percent for 2022 from the 6.5 percent expected in October. Part of this change reflects stronger economic performance over the past year, leaving less room for recovery, but it also reflects the financial pain that households will suffer.

However, the fiscal watchdog will say wage growth will be stronger and unemployment has been better than expected, prompting the economy’s cash size – including domestic inflation and growth – to be revised upwards.

Improved public finances

Officials are urging the government debt outlook to improve despite low growth and high inflation.

When the cash size of the economy is larger, tax revenues increase, and that’s the story so far in fiscal 2021-22. Buoyant government revenues have so far outweighed the higher cost of servicing the government debt.

Sunak’s borrowing rule is to balance the current budget – excluding net investment – within three years and the Chancellor met this with £25bn he had left over in his October budget. The forecast for this week should be much healthier. Goldman Sachs estimates that it will have between £20bn and £50bn of extra headroom against this test, enabling the Chancellor to cushion the cost of living crisis.

Help for disadvantaged families

As public finances appear stronger, the Chancellor will struggle not to offer further help with rising living costs, in addition to a package of £150 in council tax for some households and £200 loans to cut energy bills this winter for all households in February .

Sunak says he will be “standing by” people just as he has been during the pandemic, and while the Treasury Department has defied proposals to do more on Wednesday, it has regularly exceeded expectations it had set in such statements during the Covid pandemic -crisis and earlier this year.

The Chancellor is therefore expected to join Italy, France and Germany in cutting road fuel taxes to bring prices at the pump down a bit, perhaps by 5p a litre.

He is under immense pressure to acknowledge that inflation is much higher than when the pension increase was announced last fall. To address this, he could bring forward increases in pensions and state benefits to next month rather than waiting to do so in April 2023.

In contrast to what is likely temporary support, Sunak is resisting pressure to cancel his planned April Social Security increase, arguing that it is to fund long-term health and welfare improvements. Sunak wants to be a tax-cutting chancellor and could make a down payment by cutting income taxes in the spring statement, perhaps by raising tax credits or the threshold at which people start paying Social Security.

Little support for government agencies

Unlike government benefits, which increase each year to account for inflation, the Treasury sets public spending plans for government agencies in cash every three years. The last spending review last October set budgets for 2022-23 to 2024-25.

The Institute for Fiscal Studies think tank has estimated that higher-than-expected inflation has already wiped out a quarter of the real increases in public spending Sunak had projected in October, and the Chancellor would need to spend £10bn a year to to protect public sector workers from a tight pay squeeze.

Sunak is extremely reluctant to reopen these plans just six months after they were created, and it is expected to abandon almost all government agencies as they have to fund higher costs with improved performance.

The defense budget is likely to be increased somewhat to reflect aid to Ukraine and the additional cost of deploying troops to bolster the security of NATO’s Eastern Europe.

Go for growth

At last month’s corn lecture, Sunak prioritized measures he said would boost the economy’s long-term growth. In view of the already high level of public investment spending, he stressed his wish change the tax system to give private companies greater incentives to invest and grow.

One almost certain statement in the spring statement is that the chancellor will outline options and consultations to advance those ambitions. He will propose that the UK move more permanently to a continental European form of corporate tax with higher but higher rates investment grants. The chancellor is also expected to highlight the squandering of research and development tax breaks, particularly for smaller companies, which he wants to streamline.

The only thorn in the tail for companies, particularly those in the North Sea, that do well if global oil and gas prices rise is that he may try to change the tax system on their profits again. This was last changed in 2016 when persistently low oil prices were expected and the chancellor will be tempted to increase revenues from this sector won by the Ukraine war. Improved public finances are putting pressure on Sunak to ease the cost of living crisis

Adam Bradshaw

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