It’s hard to overstate the scale of the cost of living crisis that’s coming. Inflation is surging to its highest level in four decades and the worst income squeeze on record lies ahead of us. The government cannot insulate Britain from rising global energy prices – collectively we are inevitably poorer. But they have choices about who bears that pain.
Against that backdrop, the Chancellor set himself two tasks for his Spring Statement: to offer the public some protection against the surging cost of living, and to show the Conservative Party his tax-cutting credentials. Big packages were announced on both fronts. But they fell short because of the inexplicable refusal to target support at low- and middle-income households next year and the scale of previously announced tax rises.
The Chancellor responded to surging inflation with a significant, but poorly targeted, package of support for 2022-23, including raising the National Insurance threshold from £9,880 to £12,570 in July, a 5p cut to fuel duty rates, and a £500 million increase to the Household Support Fund. But only £1 in every £3 of the support announced yesterday will go to the bottom half of the income distribution. Households in the top half gain an average of £475, compared to just £136 for the poorest fifth.
If we consider these measures alongside previously announced support for energy bills and (larger) tax rises, the Treasury is only offering limited support to household budgets next year: an average boost of just £110. That average hides big losses among households in the top half of the income distribution: tax rises mean policy is actually making them worse off, by an average of £169.
These support measures have barely scraped the surface of the coming income squeeze. Even after them, the typical working-age household faces a cut in income of four per cent or £1,100 in the year ahead. The greatest falls will be felt by the poorest quarter of households – with the failure to ensure benefits keep pace with rising prices meaning their incomes will drop by six per cent. The result? A further 1.3 million people will fall into absolute poverty next year, including 500,000 children – the first time Britain has seen such a rise in poverty outside of recessions.
Nor should we expect a swift recovery from this inflation shock. Incomes are on course to be lower at the next election than they were at the last one. That would make this the worst parliament on record for living standards growth.
The Chancellor’s ‘rabbit in the hat’ was a 1p cut in the basic rate of income tax for April 2024, which looks set to save the average earner £243 a year. But the gains from the tax cuts announced yesterday are more than wiped out by previously announced tax rises: the health and care levy and the freeze to income tax thresholds. As a result, seven out of eight workers will actually be paying more income tax and national insurance in 2024-25, when the 1p income tax cut comes into effect.
The big picture is taxes going up, not down. Tax receipts as a share of the economy are set to reach their highest level since 1982-83 – the equivalent of a £3,000 rise per household since the 2019 election.
So, household finances are taking a hammering. But the public finances have actually been on the up. The Chancellor warned about higher (though largely temporary) debt interest spending that higher inflation causes. But this is more than offset by higher tax receipts – which are forecast to improve by an average of £35 billion a year, relative to the Office for Budget Responsibility’s previous forecast. In fact, borrowing across the forecast period is projected to be £25.6 billion lower than expected in the autumn even accounting for the significant tax cuts announced yesterday.
This contributes to a staggeringly quick fiscal consolidation, with borrowing falling from 14.8 per cent of GDP in 2020-21 to just 1.3 per cent in 2024-25. Britain is heading towards its lowest deficit levels since the surpluses of the early ‘prudent’ phase of Gordon Brown’s chancellorship. This gives the Chancellor £28 billion of headroom against his fiscal rule to keep debt falling. A margin for error is very sensible given the huge economic uncertainty ahead of us, and it also leaves the Chancellor with options to further prioritise support in the months and years ahead.
And he may well need to use it. By prioritising rebuilding his tax-cutting credentials within the Conservative Party, the Chancellor risks seriously misjudging the public mood. Promising a tax cut in several years’ time, while raising taxes and allowing benefits to fall today as prices soar is not serious policy-making.
Successful politicians focus on answering the question the country is actually asking when they find themselves in a position of leadership. That’s what the Chancellor did with the furlough scheme as we entered the pandemic. But as we come out of it, high inflation is the defining feature of the economic landscape and this week he’s fallen far short of adequately wrestling with it.
Torsten is the Chief Executive of the Resolution Foundation.