Improving public finances put pressure on Sunak to ease cost of living crisis

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Rishi Sunak has been Britain’s Chancellor for just two years, but has had to deal with a coronavirus crisis and now the Russian invasion of Ukraine – which are fueling a cost of living crisis in his country.

The Chancellor had hoped to move to one budget per year with a spring statement that simply updated the economic and public finance forecasts and floated some medium-term ideas for tax changes requiring formal consultation.

Until a few weeks ago, this was still Sunak’s strategy for Wednesday’s statement, but the war in Ukraine disrupted that. Instead, he will now have to deal with dramatically changed economic forecasts and enormous pressure to insulate British families from the inflationary forces the war has unleashed.

Here are five things to watch for in the spring statement.

The stagflationary shock

The Office for Budget Responsibility learned of its inability to use up-to-date data in the October budget. This time, it closed its forecast on March 2, taking into account movements in financial and commodity markets during the first week of the Russian invasion. The figures will be an accurate attempt to describe the economic effects of the crisis.

Concretely, the impact will be an inflation forecast much higher than the 5% peak than the fiscal watchdog considered in October; a peak much closer to 10% is now expected, with the exact figure depending on the gas and electricity price forecasts adopted by the OBR.

This, he will say, will significantly compress household incomes, significantly reducing real growth from the 6.5% for 2022 forecast in October to closer to 4%. Part of this change reflects stronger economic performance last year, leaving less room for recovery, but it also reflects the financial difficulties that households will face.

The fiscal watchdog will say, however, that wage growth will be stronger and unemployment has been better than expected, so the cash size of the economy – including domestic inflation and growth – will be revised upwards.

Improvement of public finances

Officials strongly suggest government borrowing forecasts will improve, despite weak growth and high inflation.

When the cash size of the economy is larger, tax revenue increases and this has been the case so far in the 2021-22 financial year. Buoyant government revenues have so far offset rising public debt service charges.

Sunak’s borrowing rule is to balance the current budget – excluding net investment – within three years, and the Chancellor has stuck to it with £25billion to spare in his October budget. This week’s outlook should be significantly healthier. Goldman Sachs estimates it will have between £20bn and £50bn of extra headroom over this test, leaving the Chancellor in a position to ease the cost of living crisis.

Help for families in difficulty

With public finances looking stronger, the Chancellor will be hard pressed not to offer further help with the rising cost of living on top of February’s package of £150 council tax rebates for some households and £200 loan to cut energy bills this winter for all households. .

Sunak says he will “stand with people” the same way he has during the pandemic, and while the Treasury resisted suggestions that it would do more on Wednesday, it consistently exceeded expectations. he attempted to define in such statements during the Covid Crisis and earlier this year.

The Chancellor should therefore follow Italy, France and Germany in lowering taxes on road fuels to lower pump prices a little, perhaps by 5 pence a litre.

He is under enormous pressure to acknowledge that inflation is much higher than when the benefit hike was announced last fall. To remedy this, he could bring forward hikes in state pensions and benefits to next month rather than waiting to do so in April 2023.

Unlike likely temporary support, Sunak is resisting pressure to roll back his planned National Insurance increase in April, arguing it is designed to pay for long-term health and social care improvements. Sunak wants to be a tax cut chancellor and could make a down payment on that by cutting income tax in the spring return, maybe increasing tax breaks or the threshold at which people start paying national insurance.

Little support for ministries

Unlike state benefits, which are adjusted each year to take account of inflation, the Treasury draws up public spending plans for ministries in cash terms for three years at a time. The last spending review, last October, set the budgets for 2022-23 to 2024-25.

The Institute for Fiscal Studies think tank has estimated that higher-than-expected inflation has already wiped out a quarter of the real public spending increases Sunak predicted in October, and the chancellor is set to spend £10bn a year to protect public sector workers from tight wage pressure.

Sunak is extremely reluctant to reopen these plans just six months after drawing them up and is expected to leave nearly all ministries on hold, having to fund higher costs with improved performance.

Although Sunak said defense should live within its existing budget, a small increase is possible to reflect aid to Ukraine and the additional costs of deploying troops to Eastern Europe.

On the way to growth

At the But conference last month, Sunak prioritized measures that he said would boost the economy’s long-term growth. With public investment spending already high, he stressed his desire to change the tax system to provide more incentives for private companies to invest and grow.

A virtual certainty in the Spring Statement is that the Chancellor will present options and consultations to advance these ambitions. He is set to suggest the UK move more permanently to a continental European form of corporation tax with higher rates but bigger investment allowances. The chancellor is also expected to highlight the waste of research and development tax credits, especially for small businesses, which he wants to streamline.

The only downside for companies, especially those in the North Sea, which are doing well as global oil and gas prices rise, is that it could seek to change the tax treatment of their profits again. This was last changed in 2016, when oil prices were expected to remain persistently low and the Chancellor would be tempted to increase revenues for this sector, which gained due to the war in Ukraine.

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