Spring Statement 2022: the fiscal and economic outlook

For more detail of the tax measures announced in the Spring Statement, see our article Spring Statement 2022: the Chancellor’s Tax Plan

Chancellor Sunak’s Spring Statement would not normally be expected to have contained significant new tax measures. But a cost of living crisis even before the war in Ukraine, the war itself, further rises in energy prices and war sanctions on Russia have combined to force modestly the hand of the Chancellor in the face of cuts to growth forecasts and looming election timetable.

When we published our Outlook for 2022 back in January we described this year as one of transition - from the acute phase of COVID outbreaks to learning to live with it and from the super-fast recovery growth rates to the slower rates of more normal times. On the latter we said that the Race to Recovery was going to move from a sprint to a marathon.

Slower growth ahead

Today’s Spring Statement from Chancellor Sunak has confirmed that slowdown in dramatic fashion: the OBR now forecasts GDP growth this year of only 3.8%, sharply lower than its expectation of 6% in its October 2021 forecasts and around half the rate achieved in 2021 - the Sprint phase of the recovery. Subsequent years’ growth forecasts have also been reduced to 2% or lower.

The proximate cause for those cuts to forecasts has been the rise in oil prices - well underway even before the onset of war in Ukraine: by October 2021, Brent crude prices had risen to $87 a barrel, on COVID-related supply dislocations, before the Omicron outbreak slowed growth expectations and with it lowered the oil price in December.

War in Ukraine - a human tragedy and renewed oil spikes

But the human tragedy of war in Ukraine and the associated sanctions on Russia re-ignited that upward trend. Indeed, while many public markets - equities, bonds and sterling - were largely unmoved in the immediate aftermath of the Spring Statement (much of it already trailed in the press) Brent crude spiked higher again by $2 to $114 - a new high since the ending of the Global Financial Crisis some 14 years ago.

That hike in oil prices was likely not because traders saw increased demand flowing from Mr. Sunak’s measures but because of their further concern about Russia’s overnight moves to close the taps on the Caspian Pipeline for two months - apparently to allow for repairs from storm damage; the pipeline had been due to transport some 1.5 million barrels a day of crude oil in April - about 15% of Saudi Arabia’s daily output. It may be another sign that sanctions can cut both ways.

Sunak’s second demon - inflation

Sunak had to fight another demon in his speech today – inflation - where again the OBR had to make a significant change to forecast: it now expects CPI to rise to over 8% later this year - double its previously estimated peak - before falling in 2023 and reaching the Bank of England’s target rate of 2% sometime in 2024. The cost-of-living crisis, already severe before the war in Ukraine - would become harsh without some action to ameliorate its worst effects.

Hence the £3,000 increase in the threshold before National Insurance is paid and the reduction of 5p per litre in fuel duty until March 2023. Both are welcome measures, so too the cut in VAT on energy efficiency materials. Taken together with other measures, including the ambition to cut income tax by 1% by the end of this Parliament, the Spring Statement is estimated by the OBR to lower the tax burden by 0.4% of GDP. A helpful gesture towards assuaging - but not solving - the cost-of-living crisis.

Tax burden still rising to WW2 levels

And not enough either to make a material difference to the planned increase in the UK tax burden from previous measures announced by Chancellor Sunak which the OBR now estimates will take the overall tax burden from 33% of GDP in 2019-20 to 36.3% in 2026-27 - the highest level since the end of World War 2 - including an increase equivalent to almost 1% of GDP in onshore Corporation Tax rates.

It is said that ‘all budgets are politics' and one of many elephants in the room while Chancellor Sunak was speaking was the date of the next General Election in the UK. It is currently scheduled for Thursday May 24th, 2024 - a date set under current relevant legislation known as the Fixed-term Parliaments Act (2011) which requires a fixed 5-year term for any parliament subject to a few exceptional conditions.

Election timetable - the political elephant in Sunak’s room

But that is about to be repealed by a new Bill, the Dissolution and Calling of Parliament Bill, which is expected shortly to receive Royal Assent. The new Bill (to become an Act) will give the Prime Minister power again (via the exercise of the royal prerogative) to call the election at a time of his/ her choosing.

Most commentators (including this one) have anticipated this change and point to the election coming in Spring or Autumn of 2023. Either one of those dates puts added significance to the imminent local government elections in England and Wales due in May of this year. Taken together the elections timetable, likely fore-shortened, would tend to point towards a more dovish tone to fiscal policy - not least to help close the roughly 5-point lead currently held by the opposition Labour Party.