For a statement which the Treasury like to bill as not being a full fiscal event, it feels like a lot happened yesterday.
Fuel duty was not only frozen but cut by 5p for a year. A big increase in the National Insurance thresholds will lift millions out of paying any tax at all and benefit most workers by more than £300 a year. Perhaps the biggest surprise of all was the promise of a cut to the basic rate of income tax, from 20p to 19p, in 2024.
The changes announced to National Insurance and Fuel Duty alone were worth around £9bn over the next financial year, with the promised income tax cut worth a further £5bn. These are huge numbers by the standards of any Budget, let alone a Spring Statement.
The Chancellor will perhaps, therefore, feel a little hard done to by the headlines he awoke to this morning. Most newspapers have led on the huge hit to living standards which is forecast for the coming years. In Sunak’s defence, that’s not something he has that much control over. He can change a tax or a benefit here or there, yes, but the cost of living crisis is being driven by global forces out of his control.
As he has been trying to emphasise, he can try to cushion the impact in places, but he cannot simply compensate every household and every business for the higher costs they are facing. Not only would that risk an inflationary spiral, it would also only add further to the increasingly expensive stock of government debt. Spending on debt interest is forecast to be £83bn over the next year – double what was expected in the last forecast from October.
The increase in the NI threshold is a good way of offsetting the impact of the planned new Health and Social Care Levy for households on low or medium earnings, and will mean that, taking the two measures together, those earning below around £40,000 will be better off. It’s a policy which the Centre for Policy Studies, and especially my colleague Tom Clougherty, has been championing for years (as the Chancellor recognised in his speech). It means that the thresholds for income tax and National Insurance are now aligned, which is a welcome simplification, and also reduces the marginal tax rates of millions of people whose earnings sit somewhere within the roughly £3,000 band which the threshold is being raised by. Considering many of those people will also be receiving Universal Credit, the NI change coupled with the cut to the taper rate in the Budget (another CPS policy win) will mean many of the lowest paid can now keep much more of their earnings.
The promise to cut income tax was unexpected and, if delivered, will be a first for many years, as the Chancellor was keen to stress. It does seem somewhat pointless, though, given that he is also increasing the rates of National Insurance. It will be a tax cut which benefits not just workers but other groups, including landlords and people with generous pensions, whereas the NI rise only affects employment income.
It was also disappointing not to see something more done to support the very poorest through the welfare system. As I wrote recently on this site, benefits are not being uprated by anywhere near the actual level of inflation households will be facing this year. A special uprating this year, offset later down the line, would have been a good move, but instead the Chancellor limited his intervention to an extra £500m for local authorities to support the most vulnerable.
An encouraging announcement, slightly buried amongst all the hype around tax cuts, was a review of how the tax system incentivises investment. The UK’s economic performance has been hampered for decades by low levels of private sector investment. The Chancellor recognised the need for a better system once the super deduction runs out next year, and promised to spend the coming months putting together proposals for long-term reforms to present at the next Budget.
That could end up being the most important of all of yesterday’s announcements, because of the potential impact it could have on productivity and growth in the future. All of these questions of tax, spend, and living standards too, are all made a heck of a lot easier if the economy is growing strongly and wages are rising. Sunak signalled very clearly that he gets that. Now let’s hope he delivers.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
