Rishi Sunak’s Spring Statement – what is the outlook? - PKF Francis Clark
skip to Main Content
Merry Christmas! Our offices will be closed from 1pm on Christmas Eve, reopening on Tuesday 4 January.

Rishi Sunak’s Spring Statement – what is the outlook?

In the Autumn Budget in October 2021, the Office for Budget Responsibility (OBR) was forecasting that the Consumer Prices Index measure of inflation would peak at 4.4% in the second quarter of 2022. By January this year, it had already hit 5.5% and the Bank of England now expects it to rise to around 7% in the spring. The old Retail Prices Index that many prefer is even higher.

As has been clear for some time, we are in a more inflationary environment thanks to a pincer movement of too much money chasing too few goods due to monetary creation, exacerbated by supply chain problems due to Covid, events in Ukraine and Brexit. It is an awful combination made worse by the rapid GDP growth of the last year or so, which is likely to result in the need for the brakes to be applied to the world economy and a sharp slowdown.

Nothing looks easy for Rishi Sunak and I expect that he will want the Spring Statement on Wednesday 23 March to be as low-key as he can because he’s in a real bind, given the state of the Government’s finances.

The Chancellor warned in October that a one per cent increase in inflation and interest rates would add around £23 billion to the Government’s borrowing costs. To put that in perspective, the new Health and Social Care Levy is only expected to raise £12 billion a year.

On the one hand, he’s under pressure to do more to help households and businesses with soaring energy costs. The Resolution Foundation has estimated that real household incomes will fall by 4% in the coming year – the sort of squeeze on living standards we’ve only seen around the recessions of the financial crisis, early 1980s and mid-1970s. Current events have also increased pressure on the Government to spend more on defence.

On the other hand, the high Government debt means any measures to address the cost of living crisis or help businesses are likely to be relatively small in fiscal terms – tens of millions rather than billions. There is also undue optimism on the impact of the inflationary outlook on the nation’s coffers. It is true that tax revenues will rise – but the costs of what the taxes pay for are also going to increase and the ‘levelling-up’ projects could be scaled back further.

Those calling for more spending may point to Government borrowing coming in £17.7 billion lower than forecast in the financial year-to-January. But it’s worth remembering that the £2.3 trillion public sector debt pile is still growing – and rising inflation means the cost of servicing that debt is going up.

In the year to March 2021, the Government borrowed £321.9 billion – more than double the previous record, largely due to the impact of the pandemic. This borrowing was equivalent to 15% of GDP – the highest ratio since the end of the Second World War.

More recently, the OBR’s latest commentary on the public sector finances notes that while tax receipts in the year to date are £29.1 billion higher than forecast, higher inflation has raised debt interest costs.

Inflation is a double-edged sword for the Chancellor. If prices and wages increase, the Treasury’s coffers are swelled by higher VAT, income tax and National Insurance receipts. But as I noted after the Autumn Budget, the big concern is that inflation also pushes up the interest due on the Government’s debt, a quarter of which is index-linked.

The Chancellor warned in October that a one per cent increase in inflation and interest rates would add around £23 billion to the Government’s borrowing costs. To put that in perspective, the new Health and Social Care Levy is only expected to raise £12 billion a year. And as we know, inflation since then is outstripping the OBR’s forecast.

Sooner or later the Chancellor will have to look at taxing wealth more to balance the books.

Higher inflation will also lead, sooner or later, to higher public sector wages, higher benefits and higher costs on infrastructure projects. It looks like the extra tax revenue may be counted first, but the higher costs will inevitably follow and could outstrip the tax revenue.

While it’s not unusual for countries to run a budget deficit – spending more than they receive in tax and other revenues – the UK Government has only had an annual budget surplus six times since 1970/71. The last time was in 2000/01.

Some economists might argue that countries, unlike companies, don’t need to worry operating a deficit budget year after year, but most accountants would tell you it’s not sustainable to go on spending more than you earn forever.

At the Autumn Budget, Rishi Sunak set out two fiscal rules to keep the Government “on the path of discipline and responsibility” in a new Charter for Budget Responsibility:

  • To have public sector net debt as a percentage of GDP falling
  • To balance the current budget, only borrowing to invest

Notwithstanding better than expected self-assessment tax receipts in January, if he is to stick to his own rules (by the third year of every rolling forecast period), the Chancellor’s ability to meet the growing calls to help households and businesses will be constrained by rising inflation and weaker economic growth.

Put simply, balancing the operating budget within three years is going to require spending cuts, tax rises or a combination of the two. 

The Government will need to wean itself off fuel duty and find new sources of tax revenue as the transition to electric vehicles gathers pace.

What might Rishi Sunak do?

As I outlined after the Budget, a number of previously announced tax changes are due to come into force in April 2022 and April 2023. Postponing these could offer some respite to households and businesses struggling with soaring energy costs.

However, a last-minute delay to April’s planned increase in National Insurance would be damaging for the Government’s fiscal credibility. It’s too late to avoid the inflationary impact of it, as wages and prices have already started rising in anticipation. And it would also push the tax rise closer to the next General Election, when the Chancellor would no doubt prefer to be making some giveaways. For all these reasons, I think this is unlikely.

In the short term, with prices shooting up at the pumps, it looks like the Chancellor will do better out of fuel duty than expected. This may allow some scope to address the cost of living crisis, beyond the measures already announced. There have been calls for a cut in VAT on domestic energy, but the argument against this is that support would not be targeted at those who need it most.

Many business owners will be hoping to see some overdue reform of business rates.

In the longer term, the Government will need to wean itself off fuel duty and find new sources of tax revenue as the transition to electric vehicles gathers pace. Taxes are already high and it’s hard to see the main taxes on income going up further. Sooner or later the Chancellor will have to look at taxing wealth more to balance the books, but Tory backbenchers are unlikely to vote for that at the moment.

As I wrote last year, taxing the digital economy is on the agenda as the Treasury tries to keep pace with the rise of e-commerce. But as the current consultation on an online sales tax runs until 20 May, don’t expect an announcement on this in the Spring Statement. Such a tax is also likely to have an inflationary impact, as businesses increase prices to protect their margins.

Many business owners will be hoping to see some overdue reform of business rates, following the recent consultation on implementing measures arising from the Government’s business rates review, including more frequent revaluations and support for investment in green plant and machinery.

And given that one of the Chancellor’s declared priorities is encouraging capital investment by businesses to drive productivity and growth, could we see an extension of the super-deduction beyond April 2023?

Rishi Sunak wants to keep his powder dry for the Autumn 2022 Budget if he can. For that reason, I’m expecting him to do as little as he can manage politically at the moment, with plenty of consultations being announced and talk of more jam tomorrow. Despite that, his party expects him to offer up something for the electorate right now – it was always thus.

  • Look out for our Spring Statement 2022 analysis after the Chancellor’s speech on Wednesday 23 March. And why not join me at 12pm on Thursday 24 March for a webinar looking at what it means for individuals, businesses and the wider UK economy? Register here.
FEATURING: John Endacott
John is the firm’s head of tax. He provides high level tax advice combined with commercial acumen in terms of managing and advising on personal… read more
Back To Top