Rishi Sunak wants you to know that Vladimir Putin has thwarted his plans to slash taxes. But whilst the Ukraine crisis and the corresponding inflationary pressure have tied his hands today, metaphoric good will overcome evil and win out eventually.
The Spring Statement gave the Chancellor an opportunity to outline the state of the public finances, announce some measures to ameliorate the cost of living crisis and then set out his longer-term tax plan.
In doing so he delivered the political framework on which his party will fight the next General Election.
The headline grabber was a pledge to knock a penny off the basic income tax rate in 2024. But Sunak asked the British public to brace for pain, whilst seeking to assure them that he is building up an economic war chest.
Repositioning the Government’s north star towards ‘moral responsibility’ (does anyone even remember Partygate by the way?) he set out that in the shorter term the Government’s priority was a modest set of measures to ease the cost of living squeeze.
Most generously is the year-long cut in fuel duty of 5p per litre that motorists will see at the pumps from tonight.
The Chancellor, to the enthusiastic cheer of the Brexiteers, also took back control of VAT and is using his newfound freedom to zero-rate a host of domestic energy efficiency measures like insulation, solar panels and heat pumps.
‘Is that it?’ yelled the Labour party front bench – but for a Chancellor determined not to borrow more the answer was yes. For now.
Much more importantly though, was his vision for taxation. He has now pledged an overall reduction by the end of the Parliament and outlined the areas on which the Government will focus in the coming years.
Firstly, on the ‘cost of living’. He tackled one of the thorniest political issues – the Health and Social Care levy – straight on. The levy stays BUT he’s going to equalise the income tax and NICs payment thresholds at £12,750. This cuts £330 from most people’s annual tax bill and crucially means that 70% of taxpayers will net out up even after the 1.5% rise in NICs that comes in next month. This then puts Labour in an awkward position in their opposition to what is now a progressive tax that only actually impacts higher earners.
Secondly, to use the tax system to encourage higher growth. The Chancellor painted a disparaging picture of the UK’s lag on skills and R&D compared to other nations. Despite spending more money than the average across the OECD, he admitted that something isn’t working. He didn’t say what but promised a large scale review of R&D tax credits and a consultation to work out what happens with capital allowances once the super-deductions package comes to an end this time next year. He also indicated that he would extend the employment allowance to allow eligible employers to reduce their annual National Insurance liability by a further £1,000.
He finished with a commitment to share the proceeds of growth and the income tax cut was the surprise and headline-grabbing endnote to his economic update.
So Russia and the Ukraine crisis provide the backdrop, but the real context for this statement was the Government’s plan for the other looming battle – the next General Election.
Other takeaways: By foregoing the opportunity to spend heavily now, the Treasury has written itself a powerful rebuttal to Ministers that ask for money in the next 12 months. Away from healthcare spending, that has a guaranteed uplift via the levy, it’s going to be very difficult to get approvals for new money. How this squares with the Government’s desire to invest in housing supply and military hardware, in particular, will be something to look out for in the coming months.
The Government and the business community have a lot to work on. The next year is likely to see unprecedented levels of dialogue and consultation. This is a golden time for new ideas, particularly around how Government can help boost foreign trade, productivity and inward investment.
With the exception of the 0% VAT ratings on domestic energy efficiency measures, the Spring Statement was very quiet on the big issue of the day. Energy. The Government will announce their Energy Security Strategy next week and is likely to make some major changes to UK energy policy with plans for new nuclear, changes in funding for renewables and possibly an extended role for domestic fossil fuels being worked on as we speak.
Key measures in the Statement
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%. A pro-Brexit narrative was used as the Government-linked this to a reversal of a EU Court of Justice ruling that restricted the application of VAT relief to other energy-saving materials.
- 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.
- 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.