Ahead of the Spring Budget we asked a range of think tanks what would be the one thing they would focus on and include.
In January, with inflation growing and the energy price cap set to rise, I argued that the Government should prioritise direct cash payments in its efforts to ameliorate the cost of living crisis. I suggested a one-off £500 ‘bonus’ to households on Universal Credit and legacy benefits, and £300 to all other households unless they contain a higher-rate taxpayer.
It’s fair to say that the Treasury went a different way in its actual response. Where I had urged simplicity, they produced a rather elaborate scheme: a £150 council tax rebate for households in bands A-D (which means 80% of households), plus a £200 discount on energy bills this autumn, to be clawed back through £40 extra on energy bills over the next five years.
Recent events in Ukraine make that look inadequate and mistargeted. Average incomes could fall by more than £1,000 this year, the sort of declines we only normally see in recessions. Moreover, it is perverse to subsidise energy use at a time when we ought to incentivise cutting back – both for environmental and security reasons.
The Spring statement offers the Chancellor an opportunity to provide a support package that measures up to the scale of the crisis. The priority should be to put cash in the hands of the poorest: a £1,000 top-up for benefit recipients would do the trick. I’m less sure whether there is time and capacity to produce a broader cash payment, but at the least the council tax rebate should be increased.
The Chancellor is approaching his Spring Statement amidst a huge cost of living crisis, which is being exacerbated by the tragic conflict in Ukraine as energy prices, inflation and the risk of a recession all rise. Our forecast is for inflation to hit 8 per cent – and possibly breach the April 1991 peak of 8.3 per cent – which would cause a 4 per cent fall in real household disposable incomes this year. This would be the biggest income squeeze families have faced since the mid-1970s – and requires a bold response from the Chancellor. The crisis will be particularly acute for low-income families and pensioners as benefits like the State Pension and Universal Credit are due to rise by just 3.1 per cent in April, at a time when inflation could be well over 8 per cent. That would mean a £10 billion real-terms cut in support over the course of the year – bigger than the support provided in the early phase of the pandemic. The Chancellor should address this by uprating benefits by a further five percentage points this year (by 8.1 per cent). This can be funded by reducing benefits uprating by five percentage points next year (2023-24) when benefits could otherwise rise by over 7 per cent amid rapidly falling inflation. This would be a one-off cost, rather than more permanent option like cancelling tax rises. But it would address the living standards rollercoaster that millions of families are set to experience, and provide crucial support during the tightest phase of Britain’s cost of living crisis.
The one thing that Rishi Sunak must urgently address in the Spring statement is the ballooning cost of living crisis. A severe combination of sky-high energy prices and rising inflation is now being exacerbated by the effect of the Russian invasion of Ukraine on gas and oil prices. Without urgent action now this could prove to be the greatest squeeze on household budgets since the 1950s. The priority for the Chancellor must be to boost incomes to avoid families falling into serious financial hardship.
In February the Chancellor announced two responses to rising energy prices: the council tax rebate and an energy bill loan. IPPR analysis of the council tax rebate showed that this was likely to leave the poorest facing fuel stress. Meanwhile the energy bill loan – a £200 reduction in bills this year, but a £50 a year increase for the next four years – looks to be a serious miscalculation by Sunak and the Treasury. The Chancellor gambled on prices going back down, yet this now looks unlikely. The policy will make next year’s high prices even higher.
Sunak can’t keep kicking the can down the road. He must grasp the nettle and do what is most effective for getting financial support to people in need. Benefits must increase to avoid families having to choose between food and heating. Given the scale of this challenge, support must also be offered higher up the income scale than Universal Credit currently addresses.
In just over a year, the Government’s ‘super-deduction’ will come to an end.
This temporary tax tweak, which took a similar form to what the Adam Smith Institute called for in our ‘Abolish the Factory Tax’ campaign, is designed to boost private sector investment and reverse years of stagnant productivity growth. As the Chancellor stated in his recent Mais Lecture, the UK’s “overall tax treatment provided for capital investment is much less generous than the OECD average.”
Before the super-deduction, firms were unable to immediately write off the cost of investments in plant and machinery against their tax bill. They still aren’t when it comes to structures and buildings. If you have to deduct investments from your tax bill over time, you end up eroding the real value of that investment through inflation and the time value of money. You also put high-capital intensive businesses in the Midlands and North at a major disadvantage, undermining the leveling up agenda.
The Adam Smith Institute calculated that allowing firms to immediately expense such investments could boost overall investment by 8.1% and boost long-run labour productivity by over £2,000 per worker.
Rather than consign the super-deduction to the policy scrapheap, it should be replaced by something called ‘Neutral Cost Recovery’ (NCR).
The Treasury is understandably reluctant to shoulder the large upfront cost of immediate (‘full’) expensing at a time where public finances are already strained, but NCR represents a more affordable alternative—at least in the short-term. Firms still deduct the value of investments from their tax bill over time, but that value is adjusted each year to account for inflation and the time value of money. The Chancellor has rightly stated that going forward his “priority will be to cut taxes on business investment.” Neutral cost recovery—effectively abolishing the factory tax—is an economically and politically sensible way of doing so.
A long-awaited Spring, and with it the Chancellor’s annual Spring Statement, is around the corner. But in the backdrop of lighter skies here in the UK, darker skies currently hang over those bearing witness to the devastating humanitarian catastrophe that is currently unfolding in Ukraine. In the safety of our homes today many of us will be reflecting on a newfound sense of security and fortune, but consequences stemming from this crisis will be felt worldwide. Our spiralling cost-of-living crisis is likely to be compounded by whirlwind changes in commodity markets threatening our short-term living standards and with it potentially our long-term trajectory to achieving net zero in a way that avoids exacerbating economic inequality.
So while defence spending is likely to be prioritised by the Chancellor, the government cannot overlook the fact that households in the UK were already hurtling towards a cost-of-living crisis fuelled by rising food and energy prices prior to the invasion. While business secretary Kwasi Kwarteng told MPs last week that he believed the public was “willing to endure hardships” in solidarity with the people of Ukraine, political leaders must not take the goodwill of the British people for granted by imposing yet more hardship in the name of enduring global volatility. There is no magic bullet, but in this moment of crisis the government has an opportunity to show it is serious about what it refers to as its “defining mission” of levelling up the UK. This means providing meaningful support to protect low-income households in the immediate term and putting investment behind the levelling up agenda in the medium to long term. Above all, it requires the Chancellor to show real commitment to addressing the postcode lottery for living standards, a challenge that will only accelerate without meaningful intervention. Government acted big when faced with the worst pandemic in a century, it must do the same in the face of the worst conflict in Europe since WWII.