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Richard Ramsey: What was in (and more importantly left out) of Spring Statement

Chancellor of the Exchequer Rishi Sunak delivering his Spring Statement in the House of Commons
Chancellor of the Exchequer Rishi Sunak delivering his Spring Statement in the House of Commons Chancellor of the Exchequer Rishi Sunak delivering his Spring Statement in the House of Commons

THE Spring Statement was initially supposed to be little more than an update on economic and fiscal forecasts. But it was overtaken by events, namely the cost-of-living crisis which has been exacerbated by the Russian invasion of Ukraine. As a result, the Chancellor, Rishi Sunak, has had to add a number of policy measures and to revisit some of the tax rises he announced last autumn.

Not surprisingly, economic growth for 2022 and 2023 has been slashed, while projections for inflation have moved in the opposite direction. The government's independent adjudicator, the Office for Budget Responsibility (OBR), expects consumer price inflation to top 9 per cent this autumn, the highest rate since the early 1980s. Inflation for 2022 as a whole is set to average 7.4 per cent and for 2023 it is set to average 4 per cent. This isn't surprising, but it frames the stark reality of the cost-of-living crisis we now face. Indeed, the OBR said 2022 will see the biggest annual fall in living standards since 1956.

In terms of the policy measures announced, as expected, there was a temporary cut in fuel duty (an estimated £3.30 per 55-litre tank of petrol). This is welcome but the 5p per litre reduction is the minimum anticipated, and is smaller than corresponding reductions in other European countries. Indeed, even with this cut, the UK will still be bringing in more revenue from fuel duty than it did a year ago due to the scale of price increases experienced.

Perhaps the chancellor's most significant announcement concerned national insurance contributions. There had been calls across the political spectrum for the deferral of the planned 1.25 percentage point hike that is due to come into effect next month. This was not forthcoming, but Mr Sunak did the next best thing meaning the impact of the planned tax rise was softened, particularly for those on lower incomes. So he aligned the national insurance contribution lower threshold with the personal income allowance. This will initially more than compensate about 70 per cent of workers for the national insurance increase coming next month.

Overall, Rishi Sunak seemed to be trying to position himself as a tax-cutting chancellor. He provided two years of notice that the basic rate of income tax will be reduced from 20 per cent to 19 per cent in April 2024, just a month ahead of the General Election. In the meantime, the income tax thresholds will be frozen for the next four years, meaning more people will be dragged into higher tax bands as inflation lets rip.

The biggest surprise of the Spring Statement didn't concern what was in it, but what was left out. Welfare benefits are set to rise by 3.1 per cent next month. This was the rate of inflation in September 2021 which determines the annual uplift. This will represent a significant cut in real terms and many therefore expected the chancellor to uprate these benefits by a rate that better reflected current inflation rates (7.4 per cent for 2022).

Clearly he is prioritising support for people in employment in order to incentivise more people into work. There will be a significant increase in 2023, given that September will see inflation at almost double-digits, but the cost-of-living squeeze will be significant until then.

Northern Ireland will benefit from the Spring Statement through the Barnet Formula to the tune of around £47 million, which is on top of the £300m previously allocated following the chancellor's household support regarding energy costs. These funds are expected to be earmarked for targeting Northern Ireland's cost-of-living crisis. This means that whoever takes on the Communities ministerial portfolio after the Assembly elections in May will be under the microscope like never before.

The inflation outlook is also bad news for public expenditure. It means money allocated for public services won't stretch as far as it otherwise would have. The next Finance Minister will also have to determine pay settlements in the highest inflationary environment since the Stormont Assembly came into existence.

Selling 2-3 per cent pay rises when CPI is set to top 9 per cent is a tough ask to say the least. Clearly, if pay was to rise in line with inflation, this would result in a severe squeeze in public expenditure elsewhere.

We have already seen much in the news about industrial action. Well, the conditions are there for this to intensify in the months ahead.

Richard Ramsey is Northern Ireland chief economist at Ulster Bank