Spring Statement: Reaction

This week’s Spring Statement from Chancellor Rishi Sunak saw the government announcing a range of support measures focused on helping working families as well as middle and high-income earners manage the cost-of-living crisis.

While tax cuts will be welcomed, Rishi Sunak will face criticism over whether more could have been done to counteract the cost-of-living increase, particularly among society’s most vulnerable. The OBR subsequently stated that the tax cuts announced offset only one-sixth of the net tax increases since he became Chancellor two years ago.

‍Key Takeaways

-The threshold for National Insurance Contributions (NICs) will be raised by £3,000 to £12,570 in July, the same level at which Income Tax is charged.

-Workers earning less than £35,000 a year will pay less National Insurance, while those earning more than £35,000 will pay more. With NICs due to be increase by 1.25% in April, this means 70% of UK workers will have their taxes cut, thanks to the higher threshold.

-In 2024, (General Election year), the basic rate of Income Tax will be reduced from 20% to 19% This 1% reduction should be worth an average of £175 a year to 30 million people.

-A 5p cut in the duty charged on petrol and diesel has been introduced until March 2023. When VAT is taken into account, this should mean a cut of 6p a litre in forecourt fuel prices.

-The Office for Budget Responsibility (OBR) expects UK gross domestic product (GDP) to grow by 3.8% in 2022, and by 1.8% in 2023.

-The OBR expects inflation to average 7.4% this year, before falling back to 4.0% in 2023.

Investment Insight

After spending two years fixated on comments offering direction or relief in the wake of the COVID-19 crisis, it was reassuring to see markets give a muted reaction to the Spring Statement. Investor attention has turned almost entirely to central bank policy, leaving the government somewhat toothless by comparison when it comes to having a meaningful impact on markets.

The inflation forecast of 7.4% gives an indication of just how much prices are expected to rise this year, but this figure was not unexpected, and the government and the Bank of England have an almost impossible job on their hands to help curb this. Sunak attempted to do his bit by announcing a 5p per litre cut on fuel duty effective immediately, a move worth approximately £2.4bn, which will make a small dent in the price hikes drivers have been experiencing at the pumps. Even so, a 3.8% GDP growth forecast for 2022 remains higher than pre-COVID levels, and offers some comfort to investors that inflation is not decimating growth as initially had been feared.