The Chancellor faced a challenging set of economic circumstances ahead of the Spring Statement. On the morning, the Office for National Statistics indicated that inflation had reached a 30 year high of 6.2 per cent, and the Confederation of British Industry warned that the proportion of manufacturers expecting to increase prices has jumped to its highest level since 1975.
Energy bills continue to soar, and the dreaded National Insurance Contributions (NIC) hike looms heavy over struggling households and businesses.
But it was not all doom and gloom. Official figures showed a £13.2bn downward revision in borrowing and higher than expected growth and tax revenues gave Rishi Sunak a £25bn windfall to work with. The main question was whether he would use the fiscal headroom to help households facing a cost-of-living crisis or bank the money, allowing him to cut taxes.
There was disquiet amongst backbenchers, prior to the Statement, who urged the Chancellor to scrap planned NIC tax hikes and reduce the tax burden. A sentiment shared by the Institute of Economic Affairs and even the Labour Party who taunted the Conservatives on social media for presiding over a period of high taxation.
But did the Chancellor deliver?
The Chancellor managed to hit the right notes. Taxes were cut: fuel duty was cut by 5p, VAT on energy efficient improvements was scrapped, the threshold when workers start paying National Insurance was increased by £3000 to £12,570 (matching the Income Tax allowance) and retail, hospitality and leisure sectors received a 50 per cent discount on business rates.
But that was not all. For those still doubting his low tax credentials, Rishi Sunak announced his intention to cut the basic rate of Income Tax by 1 per cent by the end of the Parliament in 2024, the first cut to Income Tax in 16 years.
Despite being dealt a bad hand, Sunak has managed to appease at least some of the fiscal hawks and dissenters in his own party. The Chancellor has listened to concerns about the tax burden and is beginning to act. Platitudes about how ‘individuals spend their money better than the state’ have been backed up with a slight change in policy direction.
If we scratch a little deeper, however, beyond the fanfare of headline grabbing announcements, the Statement was a mixed bag. Despite the change in NIC thresholds, the 1.25 per cent rise (known as the Social Care Levy) is still going ahead. Rishi Sunak claimed every penny raised by the tax will go straight to the NHS. But if the threshold rise means that revenues will decrease but the NHS budget itself has not been reduced in line with reduced revenue from NIC, where is the money for the NHS going to come from? Is the hypothecation worth the payslip it will soon be written on?
Although many free marketeers will welcome the shift in direction, as Greg Smith MP did on the IEA’s Live with Littlewood Spring Statement Special, the big picture remains troubling. According to the OBR, only a quarter of the overall value of the personal tax rises Sunak announced last year, and around a sixth of the overall net tax rises have been undone. Despite the changes, the tax burden is the highest it has been since the 1940s.
Time will tell whether the Chancellor is really interested in reducing the tax burden.