Tom Clougherty is head of tax and editorial director at the Centre for Policy Studies.
It can’t currently be much fun being Rishi Sunak. Next week’s Spring Statement was supposed to be dull. He would update us on the economy and the public finances, announce a few worthy policy reviews and consultations, confirm previously announced plans, and sit down.
Instead, only days to go, the Chancellor finds himself facing surging inflation, a cost of living crisis, and war in Europe. People want him to cut taxes, raise benefits, spend more on defence (and a hundred other things) and still keep the public finances ticking towards balance. Good luck with that.
Politically and practically, the rising cost of living – driven primarily by energy prices – is Sunak’s most immediate and important challenge. Things were bad even before Russia invaded Ukraine, but the conflict’s appalling humanitarian cost will likely be accompanied by still-higher energy prices and even an inflationary supply shock to global food markets.
So rising prices will be with us for a while. With little sign of corresponding wage increases, households across the country will be pinched. Sadly, there isn’t much the Chancellor can do about global prices. All he can currently do is help us to adapt, while sheltering the most vulnerable households from inflation’s impact.
On electricity and gas bills, the Chancellor will probably argue – with justification – that he has already responded to the pending increase in the energy price cap, and that further measures should wait until the energy price cap rises again in October.
Another possibility is help for motorists. Sunak has been urged to follow France, Sweden, Ireland, and the Netherlands’ examples by cutting fuel duty. The RAC says that rising VAT receipts from higher pump prices could be recycled into a 5p/litre cut. I’m not convinced that’s the best use of scarce fiscal firepower (especially with an ongoing ambitious transition to electric vehicles). Voters may also not notice the saving or credit the Chancellor for it. Still, my fellow motorists wouldn’t say no.
If policy changes are intended to offset cost of living pressures, it’s generally better they align with longer term plans, or have their own convincing rationale. The Chancellor could turn to two such ideas. Firstly, he could move some green levies off energy bills and fund any connected environmental programmes from general taxation. It makes sense for carbon costs to be reflected in consumer prices, but not that other commitments are loaded onto household bills.
Another sensible change would be to base automatic increases to benefits (and, ideally, tax thresholds) on the most up-to-date inflation figures we have, rather than those of six months ago. There’s no particular reason why we use such a lagged indicator. Switching to more timely and accurate uprating would help households now, but also constitute a general rationalisation. Benefits, credits, thresholds, and allowances could also be uprated alongside forecast inflation, with subsequent adjustments for over- or undershoots.
Of course, if we’re talking about rational and coherent policy, we can’t overlook the National Insurance hike soon set to take effect – which is, alas, neither. It is scarcely believable that any government, let alone a Conservative one, would choose to raise taxes on workers and employers during a cost of living crunch.
And yet here we are. If people need money, the first thing the government should do is let them keep more of what they earn. To do otherwise is politically perverse, economically destructive, and a betrayal of conservative principle.
It is also unnecessary. There is no pressing need to ‘pay down Covid debt’. The best way to pay for a one-off, pandemic-induced NHS backlog is by borrowing the money and spreading the cost over time. The Treasury is understandably worried about rising borrowing costs, but, generally, people are still prepared to lend to the government extremely cheaply. That is unlikely to change soon.
Of course, we should never borrow and spend just for it’s own sake. Balancing the budget, streamlining the state, and protecting future generations are noble goals. But there’s a question of priorities – and the decision to put fiscal targets ahead of hard-working households and their shrinking incomes suggests the wrong ones.
If the National Insurance rises can’t be cancelled or deferred, then the Chancellor should do what the Centre for Policy Studies has suggested and raise the primary threshold for individuals. That way no-one earning the average wage or below would lose out.
Such an approach would also give the Chancellor an opportunity to make good on a key 2019 manifesto promise to raise the threshold for National Insurance towards the personal allowance for income tax. It would cost around a third of the expected revenue from the health and social care levy.
In the longer term? Recent events have made clear that the government’s energy policy needs rebooting. So anything the Chancellor can do to remove barriers to new nuclear and renewables, as well as offshore oil and gas extraction (and even fracking) would be welcome. Crucially, that includes rejecting calls for counterproductive windfall taxes.
The Chancellor should also build on his recent Mais lecture, which focused on the need to ‘accelerate growth and rejuvenate our national productivity’, with a particular emphasis on business investment, skills, and research and development.
There’s an especially pressing need for policymaking for the first, given that we’re a year away from the corporation tax rate rising, the investment super-deduction expiring, and the annual investment allowance falling precipitously.
The Chancellor will likely announce a new, permanent approach to taxing business investment in this autumn’s Budget. For now, he must reassure business that he understands their concerns, and invite views on what a more investment-friendly corporation tax regime would look like.
I realise that’s an awfully long way from war, inflation, and energy crisis. But I suspect it’s precisely the sort of thing that Rishi Sunak hoped he would be originally able to focus on in his Spring Statement.
Tom Clougherty is Head of Tax & Editorial Director at the Centre for Policy Studies.