UK Chancellor Rishi Sunak approaches next week’s Spring Statement with a thorn in his side of rising costs and a UK population seemingly getting poorer each day as runaway inflation meets muted wage growth.
What had initially appeared to be book-balancing exercise is now likely to be one of damage limitation, with the Chancellor expecting to pull a few rabbits out of the hat to spare consumers while price rises are at their worst.
Heating bills
With the energy cap set to rise 54% in April, household energy bills face costs rising more than £1000 this year, with an October review, which factors in the impacts of Russia’s invasion, likely to raise them higher.
Unaddressed rising energy prices risk keeping inflation materially high even as discretionary spending falls, with the Chancellor expected to intervene before stagflation risks increase.
The fact costs look likely to increase in the long-run may deter Sunak from excessive measures, with the frugal loan given to households earlier this year perhaps extended to reduce government borrowing.
“Compensating people for a temporary increase in costs is much easier than compensating for a permanent increase. And I don’t think Sunak believes that we should all be protected for ever from higher prices,” said Paul Johnson, director of the Institute for Fiscal Studies.
Fuel duties
The Government charges a flat 57.95p per litre duty on fuel, in addition to 20% VAT, criticised by some as a tax-on-a-tax. Fuel duty generated £28bn in revenues in 2019-20.
Given the flat rate, the Government doesn’t benefit from rising oil prices in the same way as other taxes, with the OBR estimating a £10 increase in a barrel of oil would cut £300mln in revenue for the Government.
Sunak may be tempted to intervene before demand destruction hits by cutting either the flat rate or VAT to keep Britons topping up their tanks and revenues flowing to the Government.
National Insurance
Sunak may decide the hike to National Insurance, announced against a wave of bad press and in breach of the Tories’ manifesto pledge, should be delayed while inflationary pressures regulate.
The hike is expected to raise £14bn a year in government revenue intended for health and social care.
But the planned 1.25 percentage point rise would further squeeze incomes on employees’ sides, and add more costs for employers.
And data released today indicating a 0.1% rise in wages suggests employees are not getting pay rises to compensate for rising costs, increasing the scrutiny on Government’s plan to further hurt net incomes.
Ruth Gregory of Capital Economics suggested the Chancellor could double the energy bill rebate to £400, cut fuel duty by 5p, and bring in temporary VAT reductions on utilities, but drastic shifts, like abandoning NI hikes, seemed unlikely.
“Our best guess is that the Spring Statement will contain a fiscal package of about £10bn in 2022/23 (0.5% of GDP), with around half of this aimed at easing the cost-of-living crisis and the rest devoted to higher defence spending.”