BCW Political Insight: Chancellor issues holding statement, pledging tax cuts but postponing big calls until the AutumnMarch 23, 2022

Summary
Beneath the battle for headlines and the rabbits out of the hat, today’s economic update from the Chancellor and the Office for Budget Responsibility points to what we already know: unprecedented uncertainty.

The OBR reported “unusually high uncertainty” on the UK’s financial outlook and significantly downgraded growth forecasts over the coming years. It believes inflation will average 7.6% for the year and real household disposable income will see the biggest fall in a financial year since official records began. As a result of this inflation the debt interest bill alone for the UK in the next year will be £83bn – four times higher than last year.

Whilst the Chancellor announced a number of eye-catching initiatives (more on this below), his focus for intervention was on low- and middle-income earners at the expense of those on universal credit or state pensions.

All of this points to a number of key takeaways for organisations:

• The next General Election looks even more likely to be taking place in 2024. A number of initiatives the Chancellor announced will only come into force or be felt by then.
• The significant inflationary pressures to come means employee demand and union calls for substantial wage increases will only grow.
• Any ‘wiggle room’ the Chancellor felt he had to cut taxation was passed directly to the consumer. Taxes on business are not changing (apart from initiatives specifically aimed at small enterprises).

Given the cost-of-living crisis political, media and public calls for ‘windfall taxes’ or increases to corporation tax will not go away and organisations will need to continue to demonstrate the added value they bring. Not just to the exchequer, but society at large.

What does the Spring Statement mean for business?
While the cost of living rightly dominated the build up to the Spring Statement, business feared being forgotten after a year in which relationships with the Government have been pushed to breaking point.

The Chancellor went some way to rebuilding bridges with a much-needed pledge to encourage more business investment through more generous tax reliefs. But businesses will be asking why he is deciding to wait until the Autumn Budget to bringing these in given the enormity of the challenge many companies face this year from the vicious headwinds in the economy.

The OBR report released separately showed the pressure on wages from the intense competition in the labour market, with average earnings set to come in at 5.6 per cent for 2022 as a whole. There are 1.3 million vacancies and an estimated 170,000 shortfall in migration.

A review of employment training and in particular the apprenticeship levy this Autumn sends a message that the Chancellor is listening to businesses and trade associations that in recent years have expressed their frustration at the levy. Furthermore, the announcement the Employment Allowance will increase to £5,000 is a first step in this new plan.

The Chancellor also mounted a fierce defence when Labour once more called for a windfall tax on energy giants. But the Spring Statement is not ground breaking and, like in many other areas, more will be needed from the Government to bring UK PLC onside, not least in areas such as energy security and renewable investment.

What does it tell us about the Government's regulatory approach?
The Chancellor set the stage for his Spring Statement with a hymn of praise to the dynamism and innovation that democracy and personal freedom can bring to an economy: a strong signal of his return to his ideologically Thatcherite roots.

But, a barbecue of regulation the Spring Statement was not. Whilst some red meat was chucked on for the Brexiteers in the form of scrapping VAT on home improvements to increase energy efficiency, something EU law had previously prohibited, there was no recourse to deregulation as a way to supercharge the economy.

The Chancellor was also quick to make political hay by spelling out that the Northern Ireland protocol means that such VAT cuts won’t be applied in Northern Ireland. He and the NIO will be grateful for such a cut-and-dry failing of the protocol that will help them make the case for broader changes in negotiation with the European Commission.

What does this tell us about the Government's political outlook?
Rishi Sunak used a tax announcement double-header to quiet unrest on the Tory backbenches and show he is still the people’s Chancellor post the pandemic.

The rise in National Insurance threshold will obviously catch the headlines, aiming to offset the incoming damage from the poorly received health and social care levy.

The change to the threshold also serves to bring National Insurance in line with income tax, enabling the Chancellor to deliver on his second big hitter - the 1p cut that has today been confirmed will come in 2024.

Despite the cost-of-living crisis dominating the headlines alongside the war in Ukraine, there was little extra of substance to help with rising energy costs, save the 5p fuel duty cut which had already been trailed in the media.

In typical fashion for Rishi Sunak’s Treasury, the pre-statement ‘hints’ and leaks will grab tomorrow’s headlines and quieten the grumblings amongst Conservative backbenchers. Critically he has also left himself some wriggle room for later in the Parliament when he will seek to prove that he can consistently be a tax-cutting Chancellor.

View from BCW Senior Adviser, Steve Hawkes (Former Deputy Political Editor of The Sun)

"Two years on from the start of a Covid crisis that turned Rishi Sunak into a household name through his mega spending, today’s Spring Statement saw the Chancellor kick-start the countdown to the next Election with another attempt at a giveaway.

The £6 billion National Insurance tax cut is a big sum and will please the media. And while the promise of an Income Tax cut was just that, Labour will now have to decide whether to back it or oppose it.

But given global events this was tinkering at the edges. The OBR warns energy bills could go up by another 40 per cent in October, pushing inflation to 8.7 per cent in October. Living standards won’t get back to pre-pandemic levels until 2025 and there are big cuts to growth forecasts.

Again there was no big vision from the Chancellor, just sticking plasters.

The actual Budget in the autumn will now be critical for his and the Conservative Party’s fortunes".

View from BCW Senior Adviser, John McTernan (Former No. 10 Head of Strategy)

"Turns out Rishi doesn’t care about the Red Wall. Once again he has refused to give the most help to those most in need.

The Tory Government created Universal Credit (UC) – a new welfare benefit – to give seamless support to those in poverty, whether they were in work or out of work.

This has always been the obvious way to get financial support to the poorest to help with economic challenges.

£20 a week was added to UC during furlough – but taken away as soon as practically possible.

Ever since then, the Chancellor has sought ways to avoid using UC to help the poorest. He, and his officials, have always feared that any increase to benefits would be irreversible. They got away with it once – over furlough – so they aren’t risking it again.

Fiddling with National Insurance thresholds does not help the poorest.

Does it matter?

Well, in 2010 Labour campaigners on the doorstep were told that tax credits were the reason they were sticking to Gordon. The converse may be true - failing to raise UC may cost the Tories dear in 2024."

View from BCW's Head of Corporate & Responsible Business, Carolyn Irwin

"They say a week is a long time in politics. How must the Chancellor feel today, then, at the end of the four fleeting months that have evaporated since COP26? Looking back to last November, the environment – that ‘E’ of ‘ESG’ – seemed king. Today, some may ask where it has gone.

Geopolitical tensions and a burgeoning cost of living crisis have forced a complete shift in the political mood, away from big-picture pledges to smaller consumer nudges, such as tax reliefs for energy efficient households. The voices of some detractors, such as the Net Zero Scrutiny Group, are also growing louder – leading to questions about the best way forward.

Where the government hesitates, business can step in. The private sector – especially the financial sector – remains key to funding and fuelling the green transition.

But the wider question remains: does this government really have the appetite to drive a long-termist approach to climate? Today’s Statement suggests they’re sitting on a green fence."

Top Policy Announcements

Cost of Living

• Fuel duty is to be cut by 5p a litre, with the measure lasting until March 2023.
• An increase in the annual National Insurance threshold from £9,880 to £12,570, from July 2022.
• The household support fund, money for councils to support vulnerable households, will receive an extra £500 million – and will be available from April 2022.
• VAT will be cut to zero on energy saving materials in residential properties over the next five years.
• A reduction in the basic rate of income tax to 19% from April 2024.

Delivering for British Businesses

• Business rates relief on green technology will be brought forward a year to April 2022.
• Employment Allowance will be increased from £4,000 to £5,000.

Skills and Savings

• R&D tax credits are set to be reformed to provide better value and the scope will be extended
• 1,000 new AI PhDs will be created in a partnership with academia and industry.
• Measures to improve the use of the tax system to encourage employers to invest in adult training will be considered.
• The Help to Grow scheme will mean a 50% discount on software for eligible SMEs.

A new cross-Whitehall committee is set to try and save £5.5 billion in government waste.

Reaction to the Spring Statement

Think-tanks

• The free-market Institute for Economic Affairs was largely unimpressed by the policies outlined in the Spring Statement, with Director Mark Littlewood stating that “the reduction in fuel duty will make a small difference to households. The decision to raise the National Insurance threshold means workers on an average wage will see their contributions fall, despite the planned 2.5 percentage point rise going ahead.”. The IEA did praise the promised cuts to income tax and fuel duty.
  
• The Centre for Policy Studies has warmly welcomed the decision to raise the National Insurance threshold to the same level as income tax, outlining that it was a policy suggested in its 2018 paper titled ‘Make Work Pay’
  
• IPPR were critical of the Chancellor’s plan, criticising the measure for not protecting the poorest from increased costs of living, the fuel duties cut having little effect in the broader cost of living crisis, failing to raise universal credit and other benefits, and missing the opportunity for a windfall tax on the profits of oil and gas companies.
  
• Onward praised Sunak for protecting the lowest earning households from inflation, outlining that the “5p cut to fuel duty and rising threshold for National Insurance contributions offer considerable protection against spiralling inflation”.
  
• The Resolution Foundation slammed the Spring Statement as ‘badly designed’, criticising the lack of support for lower income households and it being “crazy to raise National Insurance so you can cut Income Tax”.
  
• The Taxpayer’s Alliance had a mixed reaction, praising the National Insurance threshold rise whilst outlining that the planned income tax cut is “taking with one hand to give away with the other”.

Unions

• Unite has said the Spring Statement “tinkers around the edges” of the cost-of-living crisis, leaving families to be overwhelming by pressures of inflation. With the real rate of inflation (RPI) now at 8.2 per cent, the highest in 30 years, Unite has established a commission on profiteering, announced today by the union’s leader Sharon Graham.
  
• RCN General Secretary and Chief Executive Pat Cullen, said: “Nursing feel extremely short-changed by this statement. The cost-of-living crisis means some are having to choose between filling up their cars and feeding their children. Today's fuel measures are not enough to stop nursing staff subsidising the NHS when they fill up their car.”
  
• Dr. Mary Bousted, joint general secretary of the National Education Union, said: “If the Government is serious about protecting living standards and building a strong economy, it must reverse the real terms cuts to teacher pay...with inflation so high, the impact of this year’s pay cut on living standards could be even worse than last year’s teacher pay freeze".
  
• Unison general secretary Christina McAnea warned the Chancellor of the “real danger that staff working in the NHS, care, schools, police forces and councils will look for work elsewhere, leaving vital services unable to cope.”

Industry

• Vivek Paul, UK Chief Investment Strategist at BlackRock Investment Institute had a mixed reaction to the Spring Statement, describing the plan as seeking to balance “the UK’s cost of living crisis with the desire to re-establish economic credibility with the electorate”, indicating a belief that the statement held strong political undertones in the run-up to a General Election within two years. Mr Paul went on to say that the room to manoeuvre on policy is "narrower than ever for the Bank and the Treasury" - a consequence of the coordinated fiscal and monetary easing in 2020 that amounted to a "policy revolution"
  
• Ross Duncton, managing director, head of marketing & direct at BMO said that some of the Chancellor’s announcements may have eased some concerns households had about fuel prices, but the concerns were “likely to persist”
  
• Neil Birrell, CIO at Premier Miton Investors said the Chancellor avoided being tagged with the phrase “talking a good game on tax cuts” by opting to increase the threshold on National Insurance and promising that the basic rate of tax will be cut in 2024. Mr Birrell went on to outline that the Statement was unlikely to massively change the fact that “growth is going lower and inflation is going higher”
  

Ben Beadle, Chief Executive at the National Residential Landlords Association welcomed the decision to scrap VAT on energy efficiency measures, but was disappointed of “what will be required of the rental sector when it comes to energy improvements”.