What could we see in next week’s Spring Statement?
The Spring Statement takes place next week on 23 March 2022 and while it’s only meant to be an economic update, experts said it’s unlikely the government would ignore the current cost-of-living crisis.
With energy, food, and petrol prices skyrocketing, “something’s got to give”, said Myron Jobson, senior personal finance campaigner at Interactive Investor.
“The Chancellor faces a huge call over whether to push the public’s finances further into the red – after a colossal spend on Covid support packages – to fund further cost of living respite measures or allow household budgets to be squeezed. It is a rock and a hard place type dilemma,” he added.
So, what’s likely to make the agenda? The experts share their thoughts:
Help with energy bills
The government already announced £350 to help with rising energy costs (£200 energy grant and £150 council tax rebate). But given the Ukraine Russia war, energy prices could rise to nearer £3,000 by the end of the year so the boost is just a fraction of the actual cost that needs to be met.
“One option is to extend the £200 energy bill loan scheme. This is a no-cost move over the longer term, as everyone will pay back the money over the next five years. The Government could also decide to defer when the repayments begin, as they are due to start from April at a rate of £40 a year,” said Laura Suter, head of personal finance at AJ Bell.
She added that the £150 council tax rebate could potentially be increased “as this is an actual giveaway, not a loan” but would be a big cost to the Government.
Another option which is more targeted to those who actually need it, is an extension to the Warm Home Discount scheme, which gives some low-income families £150 towards their energy bills.
“The Chancellor could increase the amount or expand the reach of the scheme. Labour is also calling for a windfall tax on oil and gas companies, with the money being redirected towards those who need it most. However, this is a politically fraught move that the Government has dodged so far,” she said.
Jobson added that the Chancellor could consider scrapping environmental levies on domestic fuel bills to support Britons amid rising energy bills.
U-turn on the National Insurance hike
National Insurance contribution rates are due to rise 1.25 percentage points in April to raise money for health and social care.
“It would be a significant U-turn from the Government but scrapping the planned 1.25 percentage points increase in National Insurance contributions would spare workers with an annual salary of £30,000 an additional cost burden of £255 per year – £505 for those earning £50,000,” Jobson said.
Fuel prices continue to reach new highs with petrol breaching £1.60 per litre and diesel hitting £1.70 per litre over the weekend. While fuel duty has been frozen for consecutive years, Jobson said the Chancellor may consider cutting fuel duty, lower VAT or do both.
He said: “The Chancellor could intervene by reducing fuel duty which is currently levied at a flat rate of 57.95p per litre for both petrol and diesel. A VAT charge is also applied on both the product price and the duty – which is essentially tax on tax.”
Triple lock inflation linking
The triple lock is a mechanism used to calculate increases to the state pension each year. It guarantees the basic state pension rises by whichever is highest out of average earnings, inflation or 2.5%. The government ditched the earnings element of triple lock this year due to earnings distortions created by the pandemic.
As such, pensioners will see a below-inflation increase in their pension payments of 3.1%. This group could be hit hard with rising living costs as more of their money are spent on energy bills and food.
Suter suggested the government could revise the inflation figure it uses for the state pension uplift, to better reflect the current inflationary environment.
“Interestingly, the latest inflation figures are released on the same morning as the Spring Statement, raising questions about whether an alternative measure of inflation will be generated to base any state pension increase on,” she said.
Unfreeze the income tax bands
The personal tax-free allowance will be frozen at £12,570 this April, and the higher rate income tax threshold will be frozen at £50,270.
The Treasury forecast this will cost taxpayers £1.6bn in the next tax year, and Suter said “clearly there is room to scrap or delay the freeze and save people money”.
She explained that the freeze will cost someone on £30,000 a year an extra £1,101 in tax by 2026/27 when the freeze is due to end, and someone on £50,000 will face an extra £5,282 in tax.
“However, a cynical person might point out that the frozen allowances are a stealth tax and so not well understood by many people. This means that unfreezing allowances might not create the kind of ‘tax giveaway’ headlines that the Government would be looking for from any handout announcement,” Suter added.
Child Benefit is worth £21.15 per week for a first child and £14 a week for a second or subsequent children.
This was a universal benefit but since 2013, parents earning £50,000+ a year need to pay back some or all of money as part of the High Income Child Benefit Charge.
Jobson said: “It is shameful that the £50,000 threshold hasn’t risen in line with earnings. Many parents earning around that figure would say they don’t feel particularly wealthy, especially giving the rise to the cost of living which has put extra pressure on household budgets.
“The government is not inherently wrong to restrict Child Benefit to certain families. But the rules are strange because you can have a situation where both parents earn just below the £50,000 threshold can keep the child benefit in full, while a single parent earning a penny above the threshold would be hit with a tax charge.”
Chancellor ‘unlikely to help households as much as some hope’
Ruth Gregory, senior UK economist at Capital Economics, said that while the pressure is on the Chancellor Rishi Sunak to go beyond the £9bn (0,4% of GDP) fiscal package announced in February before the Ukraine war, he’s “unlikely to help households as much as some hope”.
Gregory said the Chancellor has “fiscal breathing room” and as such, he could double October’s energy bill rebate to £400 (costing the Exchequer £5.5bn), cut fuel duty by 5p (costing £1.3bn), bring in a temporary VAT reduction on utilities (£2.4bn), or shoulder utility firms’ renewable obligation (£2bn)
“A rollback in the planned fiscal tightening, such as the unfreezing of tax thresholds associated with income tax, VAT and inheritance tax from April 2022 would cost £4bn-£8.8bn between 2022/23 and 2025/26.
“Some have suggested that the Chancellor should go further and uprate working age benefits and the state pension by an extra 5ppts in April, costing £9bn (0.4% of GDP). And if public sector pay awards were to reflect the change in the inflation outlook, the Government could spend a further £10bn (0.4% of GDP). If the Chancellor were to unveil all of the above on 23rd March, that would cost him between £35bn and £39bn (or about 1.5% of GDP),” she said.
However, Gregory added: “Mr Sunak is unlikely to give such large sums away, knowing full well that what may initially be intended as a temporary measure can often end up as permanent spending. Nor are there any signs that he is wavering on April’s 1.25ppt increase in National Insurance contributions. Our best guess is that the Spring Statement will contain a fiscal package of about £10bn in 2022/23 (0.5% of GDP), with around half of this aimed at easing the cost-of-living crisis and the rest devoted to higher defence spending.”