Spring statement: what to expect and why it will be a drop in the ocean

Today’s not-quite-Budget might be the most hotly anticipated in years.

And for those now facing or fearing serious everyday financial challenges, it’s painfully appropriate that it comes the same day that the latest inflation figures are released – and in the middle of Debt Awareness Week too.

As before, chancellor Rishi Sunak has another almost impossible job on his hands. Deliver a robust post-Covid recovery against the backdrop of conflict in Europe, and alleviate the now dire straits facing millions of Britons at the same time.

Unlike before though, the forecasts of serious household “squeezes” are now playing out in real life in no uncertain terms.

With the cost of living expected to be rising at a rate of 8 per cent a year by the imminent second quarter of the year, (and perhaps even higher later in 2022) the Bank of England base rate – although historically still low – due for another hike or two before the summer, and the huge 54 per cent increase in energy prices due in just a few days, ends are already failing to meet.

Think tank the Resolution Foundation says the conflict in Ukraine, forcing up energy prices and wider inflation, is now expected to mean typical household incomes across Britain will fall by 4 per cent over the coming tax year – the sharpest fall since the mid-1970s.

The think tank says that even before the war in Ukraine, the outlook for living standards this coming financial year was bleak with soaring energy bills this April disproportionately affecting low- and middle-income families.

The Money Advice Trust calculates that one in seven (an estimated 7.9 million) UK adults is already behind on at least one household bill and one in eight (around 6.2 million) have gone without heating, water or electricity in the last three months as a result of rising costs.

The charity is warning that with energy and other household bills continuing to rise and an increase in National Insurance on its way in April, millions of households will be unable to cope.

One in five adults are likely to borrow or use credit in the next three months to cover essentials, including food, clothes and bills, says the Money Advice Trust, as it calls for urgent government support to avert the cost-of-living crisis.

So what happens now?

Health hike

“[Popular interest] is focusing on how he responds to the cost-of-living crisis and the squeeze on household incomes, reflecting the sharp increase in energy prices and the forthcoming higher tax burden,” says Ruth Lea, economic adviser to the Arbuthnot Banking Group.

“So far, there have been few hints as to possible measures, albeit much speculation. However, given the better-than-expected public borrowing data so far in [fiscal year 2021], he could ease households’ difficulties by, for example, cutting taxes on fuel and domestic energy bills. Or he may delay, or even cancel, the freezing of allowances and thresholds and the planned increase in national insurance contributions.”

National insurance, as we know, is still due to go up by 1.25 per cent on 6 April.

It seems the obvious pressure point to relieve, though the chancellor has refused to be moved, notes Sarah Coles, personal finance analyst for Hargreaves Lansdown.

“It is coming at the worst possible time for cash-strapped households,” she says.

“However, there’s the chance the government could raise the income level at which it becomes payable, lifting some lower earners out of paying the tax entirely. How many people this helps depends on just how far the threshold moves.

“Rishi Sunak has also hinted that there may be more help for those on lower incomes. This could mean changes to universal credit, which is set to rise just 3.1 per cent at a time when inflation is forecast to be as high as 8 per cent.

Stealth tax U-turn?

Meanwhile, there is increasing speculation that the chancellor could raise the threshold at which workers start to pay national insurance in order to soften the impact on the lower paid of that national insurance rate hike.

“Such a move would bring a welcome boost to disposable incomes after a five-year deep freeze for most allowances and thresholds was announced last spring, notes Jason Hollands, managing direct at investing platform Bestinvest.

“Frozen allowances don’t mean that the tax burden on households and businesses remains where it is. Far from it.

Under current government plans, tax revenue is forecast to rise to 35 per cent of GDP by 2025-26. If this happens, think tank the Institute for Fiscal Studies predicts that: “It will represent the highest sustained level of tax seen in the UK since the aftermath of the Second World War”.

Some of that is down to higher tax rates.

Hollands explains: “We know already that a 1.25 per cent national insurance hike is arriving in the new tax year on 6 April. The economic mood music is swinging behind a fiscal boost – but both [the chancellor] and Boris have stated they are sticking to their guns on the health and social care levy.

And let’s not forget that the government will both be under pressure to raise wages in the public sector, as well as increase defence spending in response to the war in Ukraine.

“So it looks like the average worker will be paying £255 a year more in tax in a few weeks’ time. And that hike comes alongside an increase to the taxation of dividends, with 1.25 per cent added to the rate for each tax band,” adds Holland.

But some of it will be down to fiscal drag, as millions are drawn further over the personal tax-free allowance, and dragged further over the higher tax-rate thresholds. Likewise, as estates and properties increase in value more inheritance tax and stamp duty will be taken from them.

But others point more firmly to fuel.

Fuel funding

“Right now, it’s so bad that many people need a second job so that they can afford their first job. With petrol prices at a record high, reducing fuel duty is a must for the chancellor, and a big win on many levels,” argues Julia Kermode, founder of Nantwich-based IWork.

“Already overstretched families are struggling to survive spiralling cost-of-living increases and fuel prices mean that some can’t afford to commute to earn the money they need.

“Businesses are also suffering at the hands of rising costs, and reducing fuel duty will also help them at this critical time post-pandemic.”

But while there are reports that the spring statement may well include a cut to fuel duty of 5p a litre – a welcome change, says Coles, that still leaves the government making 80p a litre at the pumps.

"As Churchill remarked, never let a crisis go to waste,” concludes Lewis Shaw, of independent mortgage broker, Shaw Financial Services.

“Rishi Sunak has a once-in-a-lifetime opportunity to alter the direction of our economy for the better.

“We need to impose a windfall tax on energy producers’ bumper profits and use quantitative easing – our tax revenues are above where we expected so we can afford to – to begin a green new deal. This would mean new jobs and better pay. The jobs would be installing insulation to cut energy costs as more than 30 per cent of UK houses are uninsulated at present.

“We also need more double glazing and heat pumps rather than gas boilers. On top of that, solar, wind, tidal and other new energy sources are required. The time for radical thinking is now. If Rishi doesn’t act, and dramatically so, then we’ve got a recession coming that will make the one that followed the global financial crisis look like a walk in the park.”