This article is republished from The Conversation under a Creative Commons license. Read the original article here.

UK Chancellor Rishi Sunak’s 2022 spring statement was delivered in the haze of an extremely testing economic environment. As the war in Ukraine rages on, inflation has hit a 30-year high, energy bills are about to soar, tax rises are imminent and the fallout from COVID continues. With events straining the financial resources of millions of households, our panel of experts offer their views on Sunak’s announcement.

Energy prices

The chancellor said nothing to provide any warmth or comfort to the millions of householders facing spiralling energy costs in April. Some stark recent figures reveal that the average annual fixed-price tariff available for electricity and gas is now £3,213.

From April, it is expected that 5 million people will be unable to afford the average monthly rise; a number expected to almost triple to 14.5 million from October when the energy price cap is raised again. So an extra £500 million for councils from Sunak (taking the total to £1 billion) to help support the poorest households is a drop in the ocean.

Elsewhere, removing VAT from the cost of home solar panels and insulation is long overdue, but will only benefit those who can afford to install them. Energy-wise, these are plans for whoever is left in the middle classes by the time winter fuel bills hit.

Worker attaching a solar panel to a house

Cutting VAT on solar panels is green; cutting fuel duty not so much.
Anatoliy_gleb

In fuel-poverty research, there is often mention of the “heat or eat” dilemma, but we’re now looking at a winter when many households will struggle to do either. This could have been mitigated to some extent if Sunak had been brave enough to follow France’s lead and announce a windfall tax on energy companies.

Keith Baker, Research Fellow in Fuel Poverty and Energy Policy, Glasgow Caledonian University

Cost of living

With the headline rate of inflation climbing to an annual rate of 6.2% and due to rise further, all eyes were on the chancellor to provide further relief on top of the measures announced in February to help with energy bills.

Rishi Sunak rose to the challenge, with measures that will be popular with middle-income households in particular. Among them was help for motorists with a temporary 12-month cut of 5p in fuel duty from 6pm on March 23. For a medium-sized car with a 45 litre tank, this will knock £2.25 off the current £75 cost of filling the tank. The reason why this primarily benefits higher income households is that people on lower incomes are less likely to own cars.

However, fuel – particularly diesel – is also a major cost in the production and distribution of food and other goods. And it impacts on the cost of running public transport, such as buses. So, indirectly, the cut in fuel duty should help to dampen inflation more generally.

The 1.25 percentage point increase in national insurance to 13.25% due from April is still going ahead. But the chancellor has more than offset the impact for most workers by increasing the threshold at which national insurance starts to be paid.

This is increasing from £9,568 to £9,880 from April but from July will increase again to £12,570, aligning it with the income tax personal allowance. For an employee on UK average earnings (£31,772 a year) the combined effect for 2022-23 of the rise in both rates and threshold will be a cut in national insurance payments of around £30 compared with 2021-22.

Raising the threshold means 2.2 million people will be taken out of paying national insurance altogether. However, it should be remembered that many of the poorest households are not in work, so will not benefit at all.

Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open University

Rishi Sunak certainly had some eye catching ideas. Raising the national insurance threshold by £3,000 to £12,570, cutting fuel duty by 5p and reducing income tax by 1p by 2024 will certainly be welcomed by households facing astronomic rises in the price of living. But how much impact will they make?

The answer depends on who you are. For some, these changes will make a difference, although not necessarily a big one. And the focus has clearly been on increasing allowances for those working. For those unable to work, the impact will be minimal – at a time when they are in great need.

So Sunak’s plans are unlikely to reduce the number of children living in poverty, or the number of people using food banks, or the number of people having to decide between heating and eating. The best that can be said about the statement is that it might help some, and won’t cause more harm to others.

But maybe that is the best that can be hoped for. COVID has driven government borrowing to extremely high levels, and servicing that debt is expensive. Brexit has negatively affected the economy, and the war in Ukraine has added to energy prices. Within those constraints, Sunak will probably be pleased with his offerings – but others will have little to smile about.

Victoria Honeyman, Associate Professor of British Politics, University of Leeds

Tax

The cautious optimism of October’s budget has been replaced by a much more sober outlook. In fact, Sunak’s spring statement effectively demonstrated the limited power of a British chancellor to combat the combined threats of suppressed economic growth and rising inflation.

All three major tax announcements came with in-built limitations. The 1% cut in income tax won’t happen until 2024 (and on the assumption that the economy will be on more of an even keel by then).

The expected increase in the national insurance threshold was announced to £12,570, in line with the income tax personal allowance. But there was no U-turn on the rate rise.

And while the government will hope that a fuel duty cut of 5p will be widely celebrated, it will not entirely offset the increase in prices at the pump. Indeed, the cut is arguably only possible because of an increase in tax revenue from VAT caused by recent price hikes, meaning it is not really a government giveaway at all.

It is also debatable whether any of these measures will have a positive effect on those worst hit by the rising cost of living. The larger proportion of these tax changes will tend to benefit those on middle and higher incomes instead.

Gavin Midgley, Senior Teaching Fellow in Accounting, University of Southampton

Defence

Sunak began his speech by highlighting the danger posed by Russia and its war in Ukraine. Were we about to hear about an increase in spending for the Ministry of Defence? No. Sunak held firm at current levels and did not make any new pledges.

He appears to not want to massively expand public spending even in the face of military crisis in Europe. Instead it seems he is more interested in ensuring that defence spending is more efficient. But this reflects a potentially difficult tension for the Conservatives in seeing themselves as a party of both fiscal responsibility and national security.

Coldstream guards marching

No signs of extra spending.
Michael Dunlea/Alamy

Labour, meanwhile, is pushing for more defence spending – partly as a way to invest in economic recovery. The invasion of Ukraine is seen by some as an opportunity to ensure that any new UK weapons are produced in the UK.

A similar approach is being taken elsewhere. The atrocities in Ukraine have led to countries in Europe pledging to ramp up defence spending – not just for reasons of international security, but to create jobs, fund manufacturing and help secure their economies. Debating the morality of military spending may have to wait.

Peter Bloom, Professor of Management, University of Essex

Levelling up

The chancellor made no mention of “levelling up” in his spring statement. Maybe he forgot, or perhaps he preferred to steer clear of new spending commitments in what are challenging economic circumstances.

Nevertheless, the levelling up white paper published in February so far lacks the resources to meet the scale of its ambitions. Funding is significantly less than was available for local growth under previous EU schemes. So much for a Brexit dividend.

For business, there were some reforms to research and development tax credits, and promises of future tax reliefs on investment. The chancellor hopes these measures will boost UK productivity and economic growth, but it is hard to see them having a real impact.

And there was nothing to support manufacturers disproportionately hit by the energy crisis. Energy intensive industries such as steel, ceramics and glass, which are largely located in those regions in need of levelling up and are also a key part of UK supply chains, are especially vulnerable.

Phil Tomlinson, Full Professor in Industrial Strategy, University of Bath

Jobs

The chancellor offered little to help people with low paid jobs or insecure employment. Despite previous increases in the national minimum and living wages announced at the autumn budget, inflation is rising at a much faster rate than workers’ pay. And while employment levels have started to recover, there are still a record number of people on universal credit.

This is partly because people in precarious work, such as those on zero-hours contracts, are officially counted as employed. But it is “employment” which comes with financial insecurity, where workers get irregular shifts and can be simply and immediately removed from rotas.

Employers have been moving workers from secure contracts onto zero hours contracts to lower their costs – as happened to 800 P&O Ferries employees, who were replaced by agency staff last week. Agency staff are cheap because of the lack of benefits they are entitled to, and suffer as a result – facing the cost of living crisis without a steady flow of income. They need much more support than the chancellor is currently offering.

Ernestine Gheyoh Ndzi, Senior Lecturer at York Business School, York St John University

Full shopping trolley on an upward pointing arrow.
Inflation is rising fast.
Shutterstock/Maxx-Studio

Health

Over the last two years, COVID has taught us that health and the economy are intimately linked. Poverty and income are key determinants of population health; people in lower-income groups do not live as long as others.

Their choices remain stark, and any financial relief, whether it’s cuts in duty or an increase in thresholds for payment of taxes, will be welcomed by those most vulnerable to the rising cost of living.

But major challenges still lie ahead for the NHS and social care. Funding increases previously announced by the government are temporary and will be gobbled up by inflation. The system will have trouble, therefore, in reducing the treatment backlogs which mounted up during the pandemic.

Another key issue in health and social care is staff retention. This requires better pay and reductions in the cost of working (as well as living). In these respects, reductions in fuel duty are to be welcomed and will hopefully help those who do some of society’s most important jobs. But this is minor and, frankly, the very least we can do for the nurses and carers we so lauded during the pandemic.

Cam Donaldson, Yunus Chair & Distinguished Professor of Health Economics, Glasgow Caledonian University

Two years since the first lockdown, COVID is still infecting one in 20 of us, and health services are nowhere near back to normal. On top of this, 6.1 million people are currently waiting for NHS treatments and by 2025 this could double.

What’s left of the funds raised by the planned April increase in national insurance are intended to target waiting lists for the next three years, and then social care reform. Funding alone, though, will not deliver care –- workforce shortages will be the key factor limiting efforts to tackle the backlog, exacerbating the high workloads, stress and burnout which were reported even before the pandemic.

The NHS needs to train more health professionals, but in the short-term it also needs to retain staff, attract back those who have left, and potentially encourage part-time staff to increase their commitment. It is the UK’s biggest employer, with staff, like everywhere else, facing startling increases in the cost of living.

Boris Johnson, after being hospitalised with COVID, described the NHS as being “powered by love”. NHS staff might reasonably expect the chancellor to show a little more love in return.

Karen Bloor, Professor of Health Economics and Policy, University of York

Supply chains

Over the last two years, we have all learned to care more than we ever used to about supply chains. But while Sunak spoke about the need to enhance productivity, no measures were announced to help strengthen those chains.

Issues in transport and supply have now been compounded by the war in Ukraine, and will no doubt get worse before they get better. But an increased focus on training and people could help to address labour shortages, for example in recruiting and retaining HGV drivers.

And while the spring statement put a crucial focus on the cost of living crisis, the British Chambers of Commerce also highlighted the “cost of doing business” crisis – noting extreme price increases and significant supply chain volatility. The announced cut in fuel duty by 5p per litre will help to address some of these concerns.

Around 85% of the domestic freight in the UK is transported on roads. Fuel accounts for around a third of the annual operating cost of an HGV and the cut will result in an average saving of £2,356 per year per 44-tonne truck. However, there are concerns within the transport sector that this cut will do little to ease the overall burden of price increases.

Sarah Schiffling, Senior Lecturer in Supply Chain Management, Liverpool John Moores University

Fuel

Tax on fuel will be reduced by 5p from the existing level of 57.95p – a small reduction matched by little hope that the cost of petrol and diesel at UK forecourts will go down significantly any time soon.

The cut should instead be seen as one element of an “energy security” package which includes restarting licensing for hydrocarbon production in the North Sea and a push for increased nuclear energy generation.

Overall, that package aims to address energy supply security. Global markets have been severely affected by COVID (when demand was drastically reduced) and Ukraine (which has led to dramatic increases in the price of crude oil). The chancellor can do little about global market levels, but he has at least noticed motorists’ pain.

The price of a litre of petrol includes fuel duty, VAT, the retailer’s margin, plus the costs of transportation. Fuel duty is the largest share of that, so 5p may be considered a fairly modest cut. But in the light of the government’s long term aim towards reducing carbon emissions, anything more may have been seen as going into reverse gear.

Slawomir Raszewski, Senior Lecturer, Royal Docks School of Business & Law, University of East London

Two years on from Brexit

The chancellor was cheered by his Conservative colleagues when he announced a VAT cut on energy saving devices, claiming he could not have done it without Brexit. But he could have done the same within EU rules by using subsidies, and will do exactly that in Northern Ireland.

And despite offsetting some of the tax increase announced for April, the country remains closer to the model of European countries than from becoming “Singapore-on-Thames”. If the government wants to show economic gains from leaving the EU single market, it needs to start explaining what it will do differently.

Leaving the EU single market currently means less trade and more bureaucracy. New trade deals have so far failed to deliver economic benefits.

The relationship with China has deteriorated. The government estimates a 0.1% GDP gain from being a prospective member of the Trans-Pacific Partnership. Agreements with Australia and New Zealand are equally unimportant for growth and involve unpopular concessions hurting British farmers and the environment. To get a substantial US trade deal, the UK will need to diverge from EU standards, including on food safety. For now, the benefits of Brexit remain elusive.

Renaud Foucart, Senior Lecturer in Economics, Lancaster University Management School, Lancaster University

Macroeconomy

In the next few weeks, the average UK household is expected to face a 50% rise in home energy costs, with further rises expected in October. This comes on top of rising fuel prices, which in turn effects the prices of many goods and services. Meanwhile, wage rises are failing to keep up with inflation. The planned rise in national insurance to fund health and social care further reduces household income.

The public finances have taken a hit from two years of COVID support measures, and while tax receipts are increasing, the cost of servicing government debt is rising. It is a challenging set of circumstances for any spring statement to address.

The measures announced by Sunak clearly have an eye on previous election commitments to reduce tax. The future 1p cut in the basic rate of income tax, while welcome, does not have any impact on households today.

On the other hand, the rise in the national insurance threshold will have immediate impact. The extension of targeted support measures for small businesses will also be welcome. And no VAT on energy efficiency products provides a green virtue signal, but is unlikely to make substantial inroads into the poor energy performance of Britain’s housing stock.

W David McCausland, Professor of Economics, University of Aberdeen

The view from Europe

These are difficult times for European governments of all political colours. COVID forced them to open their coffers to support their economies, which resulted in strong increases in debt-to-GDP ratios. Then persistent supply chain disruptions and some pent-up consumer demand for goods led to a surge in inflation. Now Russia’s attack on Ukraine has sent energy prices skyrocketing and further exacerbated economic problems.

The chancellor began his speech by emphasising that sanctions against Russia come at great cost to the UK and its allies. In light of the various problems, governments have little room to manoeuvre. (Perhaps this also explains why the speech was uncharacteristically short; Rishi Sunak spoke for only 27 minutes.)

Despite this, Sunak delivered a rather rosy outlook for the next five years. Perhaps he had to make such optimistic forecasts for the fiscally conservative wing in his party. Given the huge degree of economic uncertainty in the world, we can safely ignore those forecasts.

The chancellor also promised to address the UK’s productivity gap compared to the US, France and Germany in the autumn budget. He wants to address the comparative lack of vocational training (compared to much of Europe) by encouraging businesses to invest more in training their employees. He also plans to reform the research and development tax credit for companies. Conventional economic theory tells us that this is exactly the right medicine for the problem. Let’s hope he delivers.

Karl Schmedders, Professor of Finance, International Institute for Management Development (Switzerland)

Business

Business will welcome the fact that there’s a new tax cut for small businesses, as well as a business rates discount for retail, hospitality and leisure, and a reduction in tax rates on business investment. However, what will worry most businesses is the fact that they will have to pay more national insurance for employees, and that corporation tax is going to rise next year.

Worse still, most businesses rely on people having disposable income to spend on the goods and services they offer. What Sunak suggested, in common with pretty much every other commentator, is that we’re going to get poorer. Those who can will reduce discretionary spending. That’s bad news for business seeking confidence in future prospects – and dreadful for the economy.

Steven McCabe, Associate Professor, Institute for Design, Economic Acceleration & Sustainability, Birmingham City University



This article is republished from The Conversation under a Creative Commons license. Read the original article here.