My column in the Sun on Sunday, next to the editorial, on addressing the cost-of-living crisis
Updated: Mar 21
On Wednesday the Chancellor delivers his spring statement to the House of Commons. With a cost-of-living crisis imminent and economic uncertainty high because of the war in Ukraine, expect Rishi Sunak to deliver a sober assessment.
The economy has rebounded solidly and is above pre-pandemic levels. Importantly, unemployment is at a low rate of 3.9%, with the Chancellor’s furlough scheme helping many firms hold onto staff. Despite this, a sharp economic slowdown is inevitable.
The pandemic blew the country’s finances apart. In the fiscal year up to April 2021, the country borrowed a mammoth £279 billion. Now, the finances are improving and government borrowing – while still huge – is around half of a year ago.
As a result, the Chancellor has some money this week for two immediate challenges.
One, is finding money to address issues linked to the war. This might include increased defence spending and help for refugees.
The second is to cushion the imminent cost-of-living crisis. This will impact everyone and is caused by higher inflation, rising energy bills and increased taxes.
Money for other areas – such as levelling-up, boosting investment and skills – may have to wait until the Budget in the autumn.
The rise in inflation is out of his control and wages are not keeping up. Costs have risen across the board. Initially the cause was supply disruptions triggered by the pandemic. Now the war is keeping oil and gas prices high and pushing food prices up. At some stage these pressures will ease, but not yet.
But inflation has also risen because the Bank of England has been asleep at the wheel. Last year, when inflation was already rising, they printed an excessive amount of money - through quantitative easing that reached £895 billion. It made the inflation outlook worse. Now, the Bank has hiked interest rates three times in recent months and rates look set to head higher, raising borrowing rates.
Energy prices are soaring too. For a long time the UK has lacked a sensible energy policy. A solution will take time and will not address the immediate rise in energy prices.
One issue the Chancellor may wish to address is to shift environmental levies away from energy bills to general taxation. From April these levies are £340 per household per year. The GMB trade union calls this, “a regressive green poll tax.” Addressing climate change is critical, it is peoples’ ability to pay that is the issue. And this leads onto the big issue the Chancellor needs to address this Wednesday: taxes.
Two tax increases will bite this spring. One is called fiscal drag. As pay creeps up it drags people into higher income tax brackets. The way this is normally addressed is for tax allowances to rise in line with inflation. Allowances have been frozen for a couple of years and change is unlikely.
The other tax is the increase in national insurance for both workers and employers. Announced last autumn it comes into effect in a couple of weeks.
There was no need for this tax in the first place. It was clear last autumn that the public finances were improving. Furthermore, it is a tax on jobs, and it is coming into effect now when incomes are being squeezed.
The Chancellor is keen not to reverse this tax. Delaying it until next year may be possible but unlikely. Instead, his approach is best captured by the three “t’s” with timely, temporary and targeted measures. He has recently announced £9 billion of measures for people on low incomes or most in need.
He could find other targeted help. Benefits and allowances could be raised in line with the latest higher inflation figures. Another is to raise the threshold at which national insurance is paid by workers. From April national insurance is paid after you earn £190 per week. In contrast, the threshold for paying income tax is based on annual income, but is equivalent to £242 per week.
The Chancellor wants to reduce the budget deficit. That is understandable. And on Wednesday he will remind us that higher inflation and interest rates pushes up debt servicing costs.
His choices are: borrow, raise taxes, austerity via cutting spending or focus on boosting growth. Or a combination of these. The trouble is taxes are already high, even for people on modest incomes. The best way to reduce the deficit is to boost economic growth, allowing the ratio of debt to GDP to fall gradually, over time.
I have watched these statements for over thirty years. One lesson is don’t just listen to what they say, watch what they do. During the pandemic the Chancellor responded well. Further action is needed now.