Roundup of the spring statement
by Rob Morgan, Spokesperson and Chief Analyst
The Spring Statement is mostly intended to set out fresh figures on how the economy is faring, but in the lead up to today’s announcements, Chancellor Rishi Sunak was urged by politicians from both sides of the house, as well as many consumer groups, to address steep rises in the cost of living.
The rate of consumer price inflation hit an annual 6.2% in February, up from 5.5% in January, according to the Office for National Statistics, another 30-year high, and with oil and food prices increases exacerbated by Russia’s invasion of Ukraine it could gather pace.
The Office of Budget Responsibility now expects inflation will average 7.4% this year before falling to 4% in 2023 and 1.5% in 2024, reflecting disruptions to global supply chains and energy markets. It also announced that inflation and tax rises will cause living standards to decline by 2.2% in 2022-23, the greatest fall since records began in 1956.
To help address this there were some limited measures from the Chancellor including a VAT cut on energy-efficient products, but nothing extra to help specifically with energy or food bills. The immediate 5p cut in fuel is clearly helpful for motorists, and even more so for the transport industry, but is not a big move in relation to the huge increase in prices at the pumps over the past couple of months. It amounts to about £50 a year for an average car owner.
Mr. Sunak was offered a little ‘wriggle room’ by strong employment numbers and buoyant tax revenues. However, the UK’s economic growth forecast for this year is now 3.8%, a sharp downgrade from the previously anticipated 6%, with a skills shortage contributing to relatively poor levels of productivity (see Garry White’s comment below).
Like many homeowners, the Chancellor is mindful of rises in the cost of servicing debt as inflation and interest rates rise. It will cost a record £83bn to service UK national debt next year, and the borrowing taken on to combat the effects of the Covid pandemic are, in his view, limiting his ability to increase spending at this juncture.
Although he was keen to portray himself as committed to cutting taxes, the substantial ‘rabbit out of the hat moment’, a planned 1% cut to basic rate income tax from 20% to 19%, only takes effect from 2024 by which time borrowing is projected to be more firmly under control and finances less vulnerable to shock.
There was no U-turn on the previously announced 1.25% increase in National Insurance Contributions – the Health and Social Care Levy – but a new adjustment to national insurance does largely reverse the impact for many employees, particularly for lower earners. The threshold at which national insurance has to be paid is rising by £3,000 to £12,570 from July, aligning it with the income tax personal allowance. Combined with the previously announced levy it means, very broadly, that those earning under £40,000 a year have national insurance savings and that increases for lower earners. (See also Sam Cowan’s comment on national insurance below).
Businesses will still need to swallow the previously announced national insurance increase, though, which adds to wage bills. Some relief for retail, hospitality and leisure businesses was announced, however, in the form of a 50% business rates discount from April.
by Garry White, Chief Investment Commentator
Chancellor Rishi Sunak is right to want Britain to transition to a high-productivity economy, but the consecutive governments have failed to make much impact. In 2019, the government's own figures show that the UK was around 15% behind the US and France on this measure per worker.
Mr. Sunak promised to cut tax rates on business investment - but not until the Autumn Budget statement. Until then, there will be consultation focusing on ways to encourage private sector investment in R&D, focusing on "people, capital, ideas".
An increase in productivity is vital if the UK is to deal with potential economic headwinds, including an ageing population and an ongoing shift to low-productivity service sector jobs. This requires investment in innovation and new technologies - areas where the UK has been lagging. The continuing digitisation of the UK needs to be high up the agenda when Mr. Sunak announces his tax reliefs in October.
by Sam Cowan, Financial Planner
It is important to remember that individuals can also control their national insurance contributions to some extent by making use of employer contributions and salary sacrifice. For those making contributions via salary sacrifice, these payments will be deducted from salary prior to deduction of national insurance or tax leading to savings for both employee and employer.
For business owners, employer contributions can be made directly from the business into the director or employees' pension prior to both national insurance and income tax also.
Individuals will need to keep abreast however of their national insurance record to ensure they are paying sufficient credits for state pension purposes.
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