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Chancellor announces fresh fiscal support in Spring Statement, but insufficient to offset cost of living squeeze

On 23 March, Chancellor Rishi Sunak presented his Spring Statement—a kind of mini-budget—and unveiled some tax cuts to support consumers. That said, the measures will not be enough to fully counteract the impact of higher inflation on consumers’ purchasing power. At the same time, the Office for Budget Responsibility (OBR)—the independent fiscal watchdog—revised up its forecasts for the fiscal deficit in 2022–2023 (1 April 2022 to 31 March 2023) relative to the projections made in October.

Policy support to households is set to total GBP 18 billion (USD 24 billion), with the Chancellor announcing a cut to fuel duty and an increase in the threshold for making National Insurance contributions, in addition to previously announced rebates for energy bills and council tax. There were no noteworthy announcements on the spending side, with the government likely taking a wait-and-see approach given large fluctuations in global energy markets. As such, spending in real terms will be lower than anticipated in the government’s Autumn budget.

The upshot is that households’ living standards are still set to suffer: Inflation is likely to surge in coming months due to Ofgem’s energy cap hike from April and higher oil and agricultural prices, while the rate of National Insurance contributions will also rise from April despite the higher threshold. The OBR expects real disposable incomes to fall 2.2% in 2022–2023, and to not recover their pre-pandemic levels until 2024–2025. Moreover, the impact of the new fiscal measures—together with a rise in debt servicing costs due to higher inflation and interest rates—is a larger fiscal deficit of 3.9% in 2022–2023 (previous OBR projection: 3.3% deficit). However, the OBR now projects a smaller deficit from 2023–2024 onwards, due to strong anticipated tax receipts.

Kallum Pickering, senior economist at Berenberg, gave his view on the Spring Statement:

“The immediate modest measures […] provide some support where it is needed while not adding much to inflation risks. […] The Chancellor is creating headroom to ease aggressively when the next downturn comes. If the UK returns to solid growth once the dual shock of Putin’s war and surging inflation (which is worsened by, but preceded the war) has faded, we would expect the Chancellor to announce modest tax cuts just before the next general election scheduled for May 2024.”

FocusEconomics panelists expect a fiscal deficit of 4.3% of GDP in 2022 and 2.9% of GDP in 2023.