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On 23 March 2022, the Chancellor gave his Spring Statement to Parliament. The Office for Budget Responsibility also published new forecasts for the economy and public finances. 

The Spring Statement is supposed to be a fairly light touch affair in which the Chancellor only makes significant tax or spending announcements where “economic circumstances require it”. However, the Chancellor did make announcements, including on personal taxes and fuel duty.

The Spring Statement was delivered in the context of higher inflation. Rising prices are squeezing household budgets, as energy, road fuel, food shopping and other items are becoming more expensive. Russia’s invasion of Ukraine is likely to exacerbate the issue, forcing UK inflation higher for longer. The Office for Budget Responsibility (OBR) now expect inflation to peak at close to 8.7% in Q4 2022, 4.3%-points higher and two quarters later than the peak in its October 2021 forecast.

Tax and spending announcements

Announced changes to taxes and spending include:

  • An increase to the level of earnings at which people start paying National Insurance contributions (NICs) from £9,880 to £12,570 in July 2022. The rise aligns the NICs thresholds (the primary threshold and lower profits limit) with the point at which people begin paying income tax on their income (the income tax personal allowance). The NICs thresholds and personal allowance will both then be unchanged until April 2026. They would normally be increased by inflation each year.
  • Reducing Class 2 NICs to zero for the self-employed with profits between the small profits threshold (currently £6,515) and the lower profits limit (currently £9,568), from April 2022. Currently, Class 2 NICs are paid at a flat rate of £3.05 if you have self-employed profits of £6,515 or more.
  • A temporary 12-month reduction of 5p per litre on fuel duty, starting from 6pm on the day of the statement.
  • A decrease, in April 2024, to the basic rate of income tax from 20% to 19%.
  • An increase in the employment allowance (which allows employers to reduce their NICs payments up to a certain amount) from £4,000 to £5,000, from April.
  • Reducing the rate of VAT on energy saving materials (such as solar panels) from 5% to 0%, for five years from April 2022. Wind turbines and water turbines will be added to the list of energy savings materials.
  • £500 million for the Household Support Fund in 2022/23. This allocation extends the fund, which received an initial allocation of £500 million for the period 6 October 2021 to 31 March 2022. It is distributed by councils in England.
  • HMRC and DWP received additional funding to collect tax, prevent and detect fraud and error, and collect debt.

OBR forecasts: the economy

Inflation

The recent sharp increase in prices have resulted in inflation reaching a 30-year high of 6.2% in February 2022, based on the CPI measure of consumer prices. The conflict in Ukraine has led to even greater inflationary pressures in the world economy, as Russia and Ukraine are large producers of various products. For the UK, the OBR notes most of the impact from the conflict will be felt via energy prices.

The OBR now expects CPI inflation to peak at 8.7% in Q4 2022 and be above 7% in each quarter from Q2 2022 to Q1 2023. This is much higher than the peak of 4.4% that was forecast in October 2021.

Household incomes

The OBR expects rising inflation to be above earnings growth over the next year or so. In addition, despite the policy measures announced in the Spring Statement, there will be a net increase in taxes across the economy starting in April. As a result, the OBR forecasts household post-tax incomes adjusted for inflation to fall in financial year 2022/23 by the largest amount (-2.2%) since records began in the mid-1950s.

On this same measure, the OBR now expects household post-tax incomes adjusted for inflation to start falling in Q2 2022. The OBR does not forecast them to recover to the same level as early 2022 until Q3 2024.

The policy measures announced by the Chancellor since October, including the £9 billion package of support to help with energy bills and the Spring Statement, are expected by the OBR to “offset a third of the overall fall in living standards” that would have occurred in the coming 12 months.

Inflation and household incomes

OBR forecasts: the public finances

Government borrowing

Forecasts for government borrowing – the budget deficit – have been lowered in all but one of the five years in the OBR’s forecast.

The OBR now expect more tax-rich economic activity, which boosts government tax revenues. Student loans reforms – announced earlier in March – also lower borrowing. These improvements to borrowing are only partially offset by higher inflation increasing debt interest payments and welfare spending. The effect for welfare kicks in from 2023/24. The Chancellor has used some of the overall improvement to the borrowing forecast to reduce personal taxes.

Government debt

Significant government borrowing has meant that public sector net debt has increased since the start of the pandemic. As a proportion of the value of annual economic output (GDP), net debt has risen from 83% of GDP in 2019/20 to a forecast 96% of GDP in 2021/22. It is expected to gradually decline, as economic growth outpaces increases in debt. By 2026/27 (the last year for which the OBR provides forecasts), debt is anticipated to fall to 83% of GDP.

One of the Chancellor’s targets for the public finances (see below) focuses on an underlying measure of the debt-to-GDP ratio. As we explain in The UK’s fiscal targets, this underlying measure excludes the Bank of England’s debt. The underlying debt-to-GDP ratio is forecast to rise to 83.5% in 2022/23, before declining gradually to 79.8% in 2026/27. Excluding the Bank of England means that this measure of underlying debt isn’t affected by some temporary policy measures that the Bank has taken following the EU referendum and pandemic.

Public sector borrowing and debt

In January 2022, the House of Commons approved revised targets for the public finances. The targets – which are explained in the Library briefing The UK’s fiscal targets – are often referred to as the ‘fiscal targets’. The OBR judged that all the targets are being met in its forecast. 


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