Spring Statement 2022: with the economy under pressure, the Chancellor faced tough choices
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Simon Gale gives his summary of the key points.
Hours before the Chancellor delivered his Spring Statement, and two years to the day since the UK’s first national lockdown, it was announced how inflation had raced to a 30-year high of 6.2%. With another jump expected in April, along with higher taxes, and the cost of energy, fuel and food soaring globally, we waited to see what Mr Sunak would – or could – do, to mitigate the pressure on households and businesses. He opened his statement with reference to the war in Ukraine, and how it has placed yet another burden on the economy; although the growing cost of living crisis has been making headlines long before Putin’s invasion.
Background and predictions
This gives context for some of the hard decisions any Chancellor would be making in a tough climate. The Office for Budget Responsibility (OBR) had previously predicted the UK economy would grow by 6.0% this year; this has now been downgraded to 3.8%. The OBR also predicts that annual inflation will average at 7.4%. This, combined with planned April tax rises, could lead to a 2.2% fall in ‘real’ household disposable incomes, the biggest since records began.
Tax cuts
With almost immediate effect and until March 2023, fuel duty was cut by 5p a litre. This had been expected, as rising costs at the pumps have already been noticed.
Although the 1.25% increase in national insurance will still go ahead in April, to raise funds for health and social care, the threshold at which people will start making NICs will rise to £12,570 in July. This is an increase of £3000, rather than £300, as had been planned. The Chancellor called this a personal tax cut for 30 million low- and middle-income workers, worth over £330 a year. There had been calls for the April rise to be scrapped entirely, however and it remains to be seen whether this new measure eases the sting.
Unexpected, however, was the 1% cut to the basic rate of income tax before the end of Parliament in 2024. As well as being the first cut in income tax for 16 years, we can perhaps earmark 2024 as when to expect a general election.
Incentives to go green
The 5% VAT rate for any residential property installing green energy, such as solar panels, a heat pump and other devices to improve efficiency including insulation is to be cut to zero, for five years. Mr Sunak said that, as we are “no longer constrained by EU law”, this has enabled him to make the change. A tempting carrot of tax savings and cheaper bills? This joins other “green” tax reliefs that UK businesses as well as homeowners can take advantage of.
Other points
For businesses, a reform of the R&D tax relief system was confirmed, in order to boost productivity. We won’t learn the detail until the Budget, where tax rates on business investment will be cut, to encourage enterprise. Also, employment allowance for small businesses is to increase, and this will start in April 2022.
For the most vulnerable, the Household Support Fund to get a boost and will be doubled to £1 billion.
Some immediate reactions claim the Chancellor didn’t go far enough in his Spring Statement – which is only ever meant to be an update, in anticipation of the main Budget in the autumn. But with times continuing to be challenging, he had to address the cost of living crisis with both new measures and strong hints of what’s to come in around six months’ time.
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