Our Response to the Chancellor's Spring Statement 2022

This was a budget of two parts. A short-term question of what to do to help households facing a grim cost of living shock and a longer-term question about the size of the state.

On the first, the government flunked an opportunity to protect households on the lowest incomes who will now be braced for a vicious cost of living squeeze. Instead, the chancellor sought to spend a large amount of poorly targeted money subsidising fossil fuel consumption. Far better would have been to have uprated benefits to keep up with inflation. This could have both protected those in greatest need while underlining the increased urgency of getting our economy off fossil fuels.

The longer-term picture was more an exercise in political optics than fiscal largesse. The chancellor used a £13bn unexpected income tax windfall created by surging inflation to fund an income tax cut and a rise in National Insurance primary threshold of similar scale. That allows him deftly to reclaim his image as a tax cutting chancellor, despite having presided over the biggest increases in personal taxation for decades. 

Propping up demand for imported fossil fuels by cutting fuel duty does little for households who most need help while undercutting incentives to reduce demand for fuel. The government should be doing the opposite: letting the market do its job in reducing demand for expensive energy imports while protecting households through direct financial support and help switching to sustainable, affordable alternatives

Global energy prices have triggered an unprecedented cost of living crisis. With inflation expected to reach 8.7% , taxes rising and the price cap increasing, the average household is set for a 5% reduction in their spending power equivalent to £1000 a year. While this will hurt us all, the crisis will hit hardest lower income households who spend a disproportionate share of their income on energy and food. For some of the most vulnerable this could be a hit of up to £1600.

Today the chancellor has responded to this unprecedented pressure on households by cutting 5p per litre off Fuel Duty and increasing the primary threshold for National Insurance Contributions as part of an £11bn tax-cut next year.

But far from prioritising help for poorer households suffering from the biggest shock to living standards in living memory, these changes are targeted disproportionately at middle- and high-income households. By comparison the £500m uplift to Local Authority funding looks paltry. The cut on VAT for energy-efficient products, while welcome, will do little to help households who can’t afford the high up-front costs required to achieve long term savings.

The case for reducing Fuel Duty, while popular with motorists, is particularly thin. By choosing to reduce Fuel Duty, the Chancellor has chosen to concentrate his giveaway into the hands of fewer people, who need it less. Worse still, reducing the cost at the pump encourages higher demand for the very fossil fuels that are driving this crisis.

As we proposed earlier this week, a much more targeted use of the money would have been a combination of uprating benefits in line with the higher-than-expected inflation. Whilst removing policy costs or VAT from electricity bills in combination with this would have given some support to households across the board and provided a stronger incentive for households to shift away from using gas to heat their homes.

The chancellor’s tax-cutting credentials are more apparent than real. Unexpectedly strong inflation handed him a tax windfall which today’s announcements recycled in eye-catching cuts to personal taxes. But by the end of the parliament personal taxation will be up by just as much as Mr Sunak planned back in the autumn.

How things have changed in six months. Last autumn the Chancellor was under pressure from his own side having announced tax rises on personal income amounting to some £20bn by the end of the parliament. In today’s spring statement he trumpeted rare tax cuts. In practice the tax cuts are an illusion. The chancellor has deftly exploited the burst of inflation to invert the narrative, but he remains the same tax-raising chancellor that he was back in September.

In last year’s budget, the Chancellor froze income tax thresholds, raising an anticipated £8bn per year by 2025-26. Then in September, through the Health and Social Care levy, he raised a further £12bn annually from personal incomes. This was all much-needed revenue. But the subsequent burst of inflation has, according to the IFS, more than doubled the anticipated revenue from the first of those measures by the end of the parliament. As a result, the expected tax hike from the measures announced last year is now around £33bn by the end of the parliament, rather than the £20bn the chancellor expected when he announced them.

Rather than pocket this unexpected windfall, the Chancellor has seized the opportunity to give it away in two tax measures. First, he’ll raise the NICs Primary Threshold by £3,000 per year to align it with the income tax personal allowance and then freeze it until 2025–26, meaning that it will be a bigger giveaway in the short term than the long term. The alignment of the two thresholds, as existed between 2001–02 and 2007–08 makes for a good tax simplification measure. It will cost £4.3bn in 2025-26. Then, just before the now all but inevitable 2024 election, he plans to cut in the basic rate of income tax to 19p, at cost of around £6bn annually. The combination of an income tax cut and a NICs rise over the next few years continues the long-term shift in taxation away from unearned income and onto income from work. In total, today’s two measures represent a £10bn giveaway, roughly equal to the inflation windfall.

The net effect of all this is more political than fiscal. Mr Sunak gets to flaunt his tax-cutting credentials, despite putting the Treasury’s plans back to exactly where they were six months ago when he was being castigated by the right for being a high-tax chancellor.

But the distributional effects of this fiscal deckchair rearrangement are more significant. Back in the autumn, the Chancellor’s tax rises looked set to affect most working households similarly (green line). The surge in inflation was set to magnify the effect of those measures (blue line).  

Today’s tax give-away essentially takes the distributional picture broadly back to where it was planned to be last autumn, but with a twist: a significant amount of the money has been handed to people with incomes at or around the higher rate tax threshold, who are now set to see a significantly smaller tax increase once all the measures are in place (purple line). The biggest winners from today’s changes in proportional terms are those in the upper-middle of the income distribution, with the top decile gaining the most in cash terms. A shrewd move to make just ahead of an election, perhaps.