On 31 March 2022, the House of Lords is due to debate a motion moved by Baroness Penn (Conservative) that “the Grand Committee takes note of the economy in light of the Chancellor of the Exchequer’s spring statement”.

Economic background

The Government noted that the spring statement took place against the backdrop of the Russian invasion of Ukraine and the sanctions imposed on Russia by the UK and its allies. The Government argued these factors “will inevitably have an adverse effect on the UK economy”. In particular, they are causing rises in inflation, particularly through the cost of domestic energy and motor fuel and increases in economic uncertainty.

Main measures in the spring statement

The policies in the spring statement with the largest financial impact were:

  • Increasing the primary threshold above which national insurance contributions start to be paid, from £9,880 to £12,570 from July 2022 (at an estimated annual cost of £6.3bn in 2022/23, reducing to £4.5bn by 2026/27).
  • Reducing the basic rate of income tax from 20% to 19% from April 2024 (annual cost £5.3bn in 2024/25, increasing to £6.0bn in 2026/27).
  • A temporary cut in fuel duty of 5p per litre for 2022/23 (cost £2.4bn).
  • An increase in the household support fund of £500m for 2022/23.
  • An increase in the employment support allowance from £4,000 to £5,000 (cost £420m to £440m per year between 2022/23 and 2026/27).
  • Investments in improved compliance and fraud reductions in both the tax and benefits systems. Together, these are expected to generate £510m in 2022/23, rising to £1.3bn in 2026/27.

In addition, the spring statement provided costings of measures announced since the last fiscal event, the October 2021 budget. These included:

What is the overall fiscal effect?

The measures announced since the autumn 2021 budget, including those in the spring statement, have an overall estimated exchequer cost of £10.7bn in 2022/23. However, in future years they improve the public finances, by £1.4bn in 2023/24 rising to £2.5bn in 2026/27.

The Office for Budget Responsibility (OBR) stated that taken together with previously announced changes, these measures would take the overall tax burden to 36.3% of GDP, its highest level since the 1940s and an increase from 33.0% in 2019/20. It said the largest contribution to the increase came from previously announced tax rises. These include:

Considering income tax and national insurance, the OBR calculated that the cuts in the spring statement (the increase in the national insurance threshold and the 1p cut to income tax) undo a quarter of the previously announced tax rises (the health and social care levy and the freeze in personal allowances).

In particular, the OBR noted that the freeze in the income tax thresholds now has a much greater effect than previously assumed. This is a result of higher inflation, which will lead to more people paying income tax and falling into higher tax bands even if their real income does not increase (‘fiscal drag’). The OBR said that the freeze is now expected to raise £17.5bn by 2025/26, an increase from £4bn in its previous forecast. It also estimated that the policy will lead to 2.8 million more people paying tax than if the personal allowance had been uprated by inflation, and 1 million more people paying the higher rate than if the higher rate threshold had been uprated.

Tax plan

Alongside the budget, the Government published a “tax plan”. The chancellor said this set out how the Government intended to use the tax system over the remainder of the parliament to:

  • Help families with the cost of living through some of the measures summarised in the previous section of this briefing, as well as other pre-announced changes, such as increasing the national living wage.
  • Boost business investment, productivity and growth. Here the chancellor announced an intention to “cut and reform taxes on business investment”, including the apprenticeship levy. He said the Government would consult with businesses and confirm its plans at the autumn 2022 budget.
  • Let people keep more of what they earn, through the 1p cut on income tax in April 2024.

What are the OBR’s revised forecasts?

This section summarises the latest figures for the economy and the public finances from the Office for National Statistics (ONS), along with the OBR’s forecasts for 2022/23 to 2026/27. The OBR said its forecasts took into account movements in financial and energy prices up to 2 March 2022. They thus included some of the effects of Russia’s invasion of Ukraine (the Russian President, Vladimir Putin, announced the military operation in Ukraine on 24 February 2022).

Inflation and living standards

On the latest ONS data, inflation, measured by the consumer price index (CPI), rose to 6.2% in February 2022. The OBR forecast that CPI inflation would reach a 40-year high of 8.7% in the fourth quarter of 2022. These rates are significantly higher than the OBR forecast in October 2021, when it expected inflation to peak at 4.4%. However, in later years, the OBR expects inflation to fall back, to 4% in 2023 and 1.5% in 2024.

The OBR commented that the higher expected rates of inflation constituted the “most dramatic change to the UK outlook since our October 2021 forecast”. It said the main causes were “sharp rises in domestic energy bills, alongside higher fuel prices and global goods inflation”, exacerbated by the conflict in Ukraine.

The OBR’s forecasts are similar to those from the Bank of England (“the Bank”), which recently stated that it expected inflation to reach 8% in spring 2022 and that “it could go even higher later this year”. In response to the increased inflationary threat, the Bank has raised its key interest rate from 0.1% in December 2021 to 0.75%.

The OBR said that higher inflation would cause living standards to fall by 2.2% in 2022/23, their largest financial year fall since records began in 1956/57, and not recover their pre-pandemic level until 2024/25. However, it said that measures announced since October 2021 offset a third of the fall in living standards that would otherwise have occurred in 2022/23.

Economic growth

Latest figures from the ONS suggested that gross domestic product (GDP) grew by 0.8% in January 2022 compared to December 2021. Year-on-year growth was 10.1%, reflecting the recovery from the coronavirus pandemic. The ONS said GDP in January 2022 reached 0.8% above its pre-coronavirus level (of February 2020).

The OBR reduced its forecast for GDP growth in 2022 to 3.8%, from 6.0% at the time of the October 2021 budget. It attributed this change to higher inflation eroding real incomes and consumption, as described in the previous section above.

In future years, the OBR suggested real growth would be slower as the pandemic recovery fades and both monetary and fiscal policy tighten. It predicted real GDP growth of 1.8% in 2023, 2.1% in 2024, and around 1.75% per year from 2025 onwards.

The OBR retained its estimate of the irrecoverable loss of output from the pandemic (‘scarring’) of 2% of GDP. It also maintained its estimates that Brexit will cause a total reduction in UK trade of 15% and a long-run reduction in productivity of 4%.

Unemployment and earnings

The current unemployment rate reported by the ONS is 3.9%. The OBR expects this to rise to 4.2% in 2023 before settling at its “structural rate” of 4.1%. The structural, or “equilibrium”, rate is the level at which pressure on wages does not change because of labour market conditions. The OBR has revised down its estimate of this rate from 4.2% in its previous forecast.

The current unemployment rate has fallen to slightly below its level immediately before the coronavirus pandemic, which was 4.0% for the three-month period December 2019 to February 2020. However, compared to just prior to the pandemic, there has been a 493,000 fall in the total number in employment. This apparent contradiction is explained by a larger rise, of 643,000, in those classified as economically inactive; in other words, not in employment and not seeking to work or available to start work. The OBR said that weaker labour market participation is particularly a factor among older people.

On the latest data, earnings growth in the UK was 4.8% in the three months to January 2022, compared with the same period a year earlier. The OBR forecast that average earnings would grow by 5.3% in 2022 and 2.8% in 2023. These are both lower than the levels of inflation forecast for the respective years, meaning the OBR is expecting average real terms pay decreases.

Public sector deficit

The public sector deficit is the difference between public sector spending and income in each year. The latest figures from the ONS state that the deficit was £177bn in 2021, a fall from £270bn in 2020 but an increase from £47bn in 2019, prior to the pandemic.

The OBR said that despite the economic “headwinds” related to inflation and living standards, the public finances are recovering from the pandemic more strongly than it expected. It said the main reason for this was higher than expected tax receipts from higher earners and companies. Therefore, the OBR revised down its estimate for government borrowing in 2021/22 to £128bn, £55bn less than at the time of the 2021 budget.

However, the OBR has revised up its forecast for government borrowing in 2022/23, to £99bn, £16bn more than in the October 2021 forecast. This is largely because it expects higher inflation to increase the cost of interest payments on the government’s debt. The OBR said that interest costs were expected to be £83bn in 2022/23, more than twice the level expected in the October 2021 forecast.

For later years predicted borrowing falls. By 2026/27, the OBR expects public sector borrowing to be £32bn, a reduction from £44bn in the October 2021 forecast. Figure 1 illustrates the predicted path of government borrowing as set out in the March 2022 forecasts.

Figure 1: Public sector borrowing, excluding public sector banks

Graph of UK public sector borrowing and forecasts, 1999/00 to 2026/27

Sources: Office for National Statistics, ‘Public sector net borrowing, excluding public sector banks (£ million): series DZLS’, 22 March 2022; and Office for Budget Responsibility, ‘Economic and Fiscal Outlook’, 23 March 2022, CP 648, p 15.

Public sector debt

The public sector debt is the total stock of borrowing resulting from past deficits, to the extent that they have not yet been repaid. According to the ONS, the most recent figure for the debt (excluding public sector banks) was 94.7% of GDP, as at February 2022.

The OBR expected this to increase to 95.6% in 2021/22 and 95.5% in 2022/23, before falling to reach 83.1% in 2026/27. In every year, the anticipated debt level is lower than was expected in the October 2021 forecast. This is a result of the lower than expected borrowing in 2021/22 and in some future years.

Figure 2 shows the path of the Government’s debt, relative to GDP, since 1999/00 and including the OBR’s forecasts to 2026/27.

Figure 2: Public sector net debt, excluding public sector banks

Graph of UK public sector debt and forecasts, 1999/00 to 2026/27

Sources: Office for National Statistics, ‘Public sector: net debt (excluding public sector banks) as a % of GDP: not seasonally adjusted: series HF6X’, 22 March 2022; and Office for Budget Responsibility, ‘Economic and Fiscal Outlook’, 23 March 2022, CP 648, p 18.

Fiscal rules

Fiscal rules are intended to restrict spending and taxation policy by setting targets for key indicators such as the budget deficit and national debt. In the autumn 2021 budget, the chancellor announced a new set of rules that came into force in January 2022.

The new rules include a primary ‘fiscal mandate’ that requires public sector net debt excluding the Bank of England, as a percentage of GDP, to be falling by the third year of the forecast period (currently 2024/25). This is a rolling target, meaning that current fiscal policy must be set so the OBR’s forecast at any time, taking into account current policy, must be for debt to be falling by the third year of that forecast.

The new fiscal rules also contain three supplementary targets:

  • the current budget (excluding investment spending) to be in balance by the third year of the forecast period, again on a rolling basis;
  • public sector net investment to be less than 3% of GDP on average over the forecast period; and
  • expenditure on welfare to be contained within a cap and margin set by HM Treasury.

The OBR is required to report on the likelihood of the rules being met. It said that based on the spring statement, all the targets would be met, with headroom broadly in line with that left by previous chancellors.

Short-term fiscal risks

The OBR identified a number of short-term risks to the fiscal outlook, in addition to those arising from the Covid-19 pandemic and the conflict in Ukraine. These included:

  • the possible need to intervene to support more energy companies, given that the price they pay for energy has risen faster than the prices they can charge consumers, under the energy price cap;
  • pressure to further support household budgets and businesses as energy prices continue to rise—including a further increase in the domestic energy price cap in October 2022;
  • the large shortfall in the benefits uprating that will take place in April 2022. Benefits will increase by last September’s CPI rate of 3.1%, but inflation is likely to average 8.0% in 2022/23;
  • that the Government decides not to implement the planned fuel duty rise in April 2023. This would result in a 6% increase in fuel prices overnight if the temporary cut to duty is reversed and duty is also increased by inflation, as currently envisaged in the forecasts. The OBR noted that no government has actually implemented increases in fuel duty since 2011; and
  • the pressure of higher inflation on departmental budgets. Higher inflation means that the real terms increases announced in the autumn 2021 spending review will be worth less than anticipated—by at least a quarter, according to the Institute for Fiscal Studies.

Political reaction

In her response to the statement the Shadow Chancellor, Rachel Reeves, said that the Government did not understand that scale of the “cost of living crisis” and that the spring statement made the situation worse rather than better. Her proposals included: a windfall tax on oil and gas producers; scrapping the health and care levy; and setting out a “proper plan to support businesses and create good jobs”.

The Scottish National Party’s treasury spokesperson at Westminster, Alison Thewliss, also called for a windfall tax on energy companies, but additionally on firms such as Amazon, Serco and Netflix that she said made “mega-profits” during the pandemic. She argued for higher uprating of welfare benefits as, she said, the Scottish Government had uprated the payments under its control. She called for the Scottish Government to be given “full fiscal powers”.

Read more

Links to a selection of articles and commentaries on the budget are provided below.


Representative bodies

Press and other

Economic background

Further information

Cover image by UK Government.