Background to Spring Statement 2022

Due to the rollout of Covid-19 vaccines, the coronavirus situation in the UK is greatly improved, compared with the previous two years. However, Russia’s invasion of Ukraine creates a new crisis. In the UK there was concern about the effect that rising prices, and other factors, are having on household budgets. The Ukraine crisis may push energy and food prices higher still.

Economic situation: Effect of the Ukraine crisis

High and rising inflation has dominated recent economic news. Higher energy costs have been a prominent contributing factor, as have increasing consumer goods prices. Food prices are also increasing.

As well as the military, political and humanitarian impact of Russia’s invasion of Ukraine, there will also be implications for the world economy, including the UK. It’s likely that energy and food prices will rise further. Russia is one of the world’s largest exporters of oil and gas, while Russia and Ukraine are important producers of various agricultural products such as wheat.

Since the conflict began, prices in many commodities markets – including in energy, food and metals – have risen but have been volatile. It seems likely that the conflict will lead to inflation in the UK rising even further than expected previously. Following the invasion, economists expect UK inflation to be higher and more persistent.

The main risk to the UK economy is that rises in the cost of living will reduce consumer spending growth, a key driver of economic growth. Higher prices and taxes are expected to lead to falls in household incomes adjusted for inflation. Business costs will also rise, potentially stemming an expected recovery in business investment, which remains well below pre-pandemic levels.

Before the conflict in Ukraine, economic indicators painted a largely positive picture of the UK economy in early 2022. The Omicron variant of the coronavirus left only minimal economic damage in December, with GDP growth rebounding strongly in January and surveys of business activity picking up in February. Meanwhile, the labour market continues its recovery from the pandemic, with unemployment falling and employment rising.

Cost of living: Household budget pressures 

Rising prices are squeezing household budgets, as energy, road fuel, food shopping and other items become more expensive.

The Resolution Foundation, a living standards think tank, estimates inflation in 2022/23 could cause the biggest annual fall in household income since the 1970s.

Low-income households are especially affected. A higher proportion of low-income households’ spending goes to energy and food and the prices of both will increase in 2022. The Resolution Foundation expects an inflation rate of over 10% for the poorest households in 2022.

In February 2022, the Chancellor announced measures to help households with “the cost of living following a rise in the energy price cap.” On the same day, Ofgem – the gas and electricity regulator – announced the energy price cap is rising by 54% from 1 April.

The Chancellor’s support included the Energy Bills Rebate – an upfront discount on households’ energy bills worth £200, repayable in annual £40 instalments from 2023/24. Household in council tax bands A to D will also receive a £150 non-repayable council tax rebate. Rises in energy prices since mean the support provided by the Chancellor offsets less of the rise in household energy bills than when first announced.

Organisations such as think-tanks, industry bodies, parliamentarians, and other commentators have proposed ways to support households. Suggestions include: increasing benefits so they don’t fall relative to prices; reducing VAT on domestic energy from 5% to 0%; levying a windfall tax on oil and gas producers to fund support for households; reducing fuel duty; increasing the Energy Bills Rebate; removing environmental levies on domestic energy; delaying or cancelling the 1.25%-point rise in NICs rates.

Public finances: Borrowing is falling 

Government borrowing – the difference between public spending and income raised from taxes and other sources – reached a peacetime record in 2020/21. It has been falling since.

In 2021/22, government spending is decreasing as the public health emergency of the pandemic becomes less acute. Government revenues are increasing as the economy is open. While borrowing in 2021/22 will be lower than in the previous year, it will still be higher than normal.

Borrowing is forecast to fall further over the coming years, as all government pandemic-related support ends and tax revenues improve on the back of a growing economy. Tax rises announced by the Chancellor in 2021 will bring in extra government revenues.

We wouldn’t normally expect tax and spending announcements in a Spring Statement, but economic circumstances may mean the Chancellor makes some. He is facing calls to support household incomes as they are being squeezed by rising energy, food, fuel prices and taxes. Calls are rising for the UK’s defence spending to increase, following Russia’s invasion of Ukraine.

The Chancellor’s targets for borrowing and debt (the fiscal targets) constrain his options to some extent, but he has some short-term flexibility as the targets are always looking three years into the future. The OBR will assess whether the targets are being met in its forecast.

Government debt (which is the stock of past borrowing) has grown from just over 80% of GDP pre-pandemic to around 96% of GDP today. Debt has been higher in the past, particularly after periods of war. Government’s spending on debt interest had reached historic lows during the pandemic, but it has increased recently, as around a quarter of the total is linked to inflation. The effect on the public finances has been mitigated by tax revenues increasing. Higher debt interest spending will become more of a concern if it’s not accompanied by increasing tax revenues.

Further information

The Library will publish a summary of the Spring Statement on 23 March.

Ahead of the Statement, the Library will publish Economic Indicators, our analysis of the latest UK and international economic indicators.

The latest data are also available on the Library’s UK economy dashboard.

The Library website has a page which brings together our publications on the Ukraine crisis.

The latest coronavirus research and analysis from the Commons Library and other parliamentary research services is available on our coronavirus hub.