Not for the first time, the chancellor Rishi Sunak stood up in the House of Commons to deliver a ‘fiscal event’ - in this case the spring statement – that was originally planned to be a modest package of measures but has been morphed by events into something of much greater importance.
The Treasury insist that the statement should not be described as a budget, but facing the highest inflation rate for 30 years, Sunak has delivered a ‘mini-budget’ of unplanned tax rises and other promised give-aways as he seeks to stave off the effects of rising prices due to the energy crisis and increased instability and economic turmoil as a result of the war in Ukraine.
With the effects of the Covid-19 pandemic already driving up goods and energy prices, the Office for Budget Responsibility now predicts that inflation will hit 7.4% by the end of the year. Clearly the chancellor needed to act to ease the inflationary burden on consumers as well as business and both groups will welcome the 5p cut in fuel duty which will offer some help in alleviating rising costs.
The construction and infrastructure sector didn’t have to wait long to receive its first potential boost from the chancellor. Barely ten minutes into his speech, he announced that for the next five years, homeowners will pay 0% VAT on energy saving materials, such as solar panels or heat pumps – a welcome move that could cut the cost of having a solar panel installed by £1,000. Hopefully this will be a sign that the government intends to continue with its net zero ambitions and indeed do so more swiftly.
Construction and infrastructure employers – indeed all employers – will welcome Rishi Sunak’s £6bn plan to lift the national insurance threshold by £3,000 – an effective tax cut for millions of workers, which the chancellor clearly hopes will reduce wage inflation pressures. Sunak also said that in the autumn he will cut tax rates on business investment he will also decide whether to make the R&D expenditure credit even more generous. In another boost for small businesses, he also said that the Employment Allowance will increase to £5,000, which the chancellor said was a tax cut worth up to £1,000 for half a million SMEs.
The chancellor’s ‘rabbit from the hat’ moment, was his pledge that before the end of this parliament in 2024, “for the first time in 16 years” the basic rate of income tax will be cut from 20p to 19p in the pound. Sunak described the move as “a £5bn tax cut for over 30 million people,” but a number of economic commentators have pointed out that many of those struggling to make ends meet will see the cut as a ‘jam tomorrow’ measure that won’t help address the immediate problem of rising prices and inflation. As Paul Johnson, director of the Institute for Fiscal Studies, said: “What is the possible justification for cutting income tax rate while raising the NI rate?”
Has Rishi Sunak done enough to stave off the inflationary pressures that are hampering recovery and growth? Time will tell. One thing is crystal clear and that is, as Sir John Armitt, chair of the National Infrastructure Commission, pointed out yesterday in our pre-spring statement coverage, “At a time of significant global volatility alongside concerns about rising living costs . . . sticking to a long-term strategy is not easy (but) the quicker we tackle these challenges, the quicker society and our environment will reap the benefits.”