Limits and Levies: A tightrope walk through the Spring Statement

21 Mar 2022

Against the backdrop of an unprecedented cost of living crisis, the Chancellor faces mounting pressure to announce greater support measures in this year’s Spring Statement. With political and economic constraints closing in, Wednesday’s announcements could see him navigate the crises of the coming months, or they could show him beginning to lose his balance.

In this blog, DRD Senior Analyst and former Treasury official, Toby Chapman takes a look at what we can expect in this year’s Spring Statement.

Image Source: The Times

Know your limits

Hot on the heels of another interest rate rise by the Bank of England, Wednesday’s Spring Statement comes at an intense moment for economic and fiscal policy makers. The uncertain backdrop of rising inflation, ongoing supply chain issues, and war in Europe means any hope of a restoration to more precedented times following the lifting of Covid restrictions are likely dashed, or at least on hold. However, unlike the radical, sweeping measures the Chancellor introduced at the height of the pandemic, the scope of any announcements on Wednesday will be acutely more limited.

The key thing to remember, is that Wednesday’s statement to the House of Commons is not a Budget. There are limitations to what the Chancellor can announce, some of which are largely functional, but many others are, as ever, political. Major changes to tax and spend policy are reserved for the Budget, whereas Spring Statements usually offer a chance for the Government to provide a broad update on the economy and progress of previously announced policies. However, the economic shocks and uncertainty stemming from the Russian invasion of Ukraine may pressure Sunak to announce at least some limited policy shifts. These are unlikely to be political crowd-pleasers, which may be why, unlike at the Autumn Budget, there have been no ‘strategic leaks’ aimed at maximising coverage of positive announcements.

With an awareness of the delicate balancing act the Chancellor is undertaking, Treasury Ministers should also be cognisant of potential issues around resource and capacity, as the department’s officials remain under substantial pressure. Having completed two joint Budgets and Spending Reviews in the space of eight months in 2021, the pace of the fiscal events calendar shows no signs of slowing. Despite hopes of a post-Covid return to normality, they are still contending with the rapid shifts and major crises which have become day-to-day in the policy landscape since the UK’s first lockdown in March 2020. Nevertheless, Ministers will, as ever, be expecting civil servants to scramble to find any ‘showstoppers’ in their respective policy areas, to effectively demonstrate positive progress and a clear vision for recovery.

Great expectations

Despite the Chancellor’s reputation for delivering vast support packages at the onset of the pandemic, he sought to manage expectations at the Conservative Spring Conference, warning that he ‘can’t solve every problem’. He dismissed indications that the defence budget could see an increase in response to the war in Ukraine, but the impact of the war at home will inevitably be high on the agenda, specifically how it has further exacerbated soaring energy prices. Treasury sources have confirmed that a cut to fuel duty of at least 5p should be expected, following record-setting highs in pump prices and mounting pressure from Tory backbenchers.

With the age-old tensions between the Downing Street neighbours alive and kicking, what the Chancellor announces on Wednesday could provide some early indication of how the already strained relationship might fare over the coming months.

Toby Chapman, DRD Senior Analyst and former Treasury official

In his response to the OBR’s economic forecast, Sunak is likely to emphasise that the UK is still in recovery, but will focus on tackling the central features of the cost of living crisis. With renewed calls to offer more help to parents struggling with childcare costs, word inside the Treasury is that policy teams have been busily working away on changes to child benefit payments. There have also been suggestions that a further reduction in the taper rate for universal credit is set to be announced, and that payments could see another (albeit limited) uplift.

Progress updates and smaller movements on previously announced policies could provide an indication of longer term shifts in the Government’s position. The Chancellor will be keen to give an optimistic update on his ‘plan for jobs’ and the post-Covid recovery, and the Government has already confirmed it will press on with plans to expand the eligibility and value of the Warm Homes Discount. Number 11 has continually insisted there will be no backtracking on the Health and Social Care Levy, despite significant pressure from business leaders and Tory MPs to abandon or delay the planned hike in National Insurance contributions. However, HMT insiders indicated that options for adjustments to the levy have been worked up, such as an increase in the NI payment threshold, to relieve pressure on the worst-affected households. Equally, the council tax rebate for properties in bands A to D, and the £200 loan for energy bill increases, could both be expanded to include a greater number of households.

Not so neighbourly

With the Chancellor’s options arguably more constrained by political and economic pressures, at a time when global events have supplanted coverage of ‘partygate’ from the news cycle, there is always the possibility that the Prime Minister may see an opportunity to re-establish himself. Amid reports that Sunak is resisting calls for a bigger aid package to address the energy crisis, some have speculated that Boris Johnson is looking to set out a wider, more ambitious energy strategy in the coming days and weeks. The aspiration might be to rebuild his image as a bold, big-ideas leader, and cut down any perception of Sunak as a natural challenger, thus staving off any renewed internal party upheaval for the time being and bolstering his position in advance of the May local elections. With the age-old tensions between the Downing Street neighbours alive and kicking, what the Chancellor announces on Wednesday could provide some early indication of how the already strained relationship might fare over the coming months.