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Spring Statement 2022

A guide for corporates

With the Spring Statement taking place amid an array of pressures on the UK economy, the Chancellor Rishi Sunak has announced tax changes, principally around fuel duty and National Insurance, with longer-term Income Tax ambitions.

Overview

The Spring Statement is a smaller affair than the annual Budget - it doesn’t typically include major tax or spending changes but rather provides the Chancellor with an opportunity to update on the overall health of the economy.

As such, this year’s Statement was themed around delivering greater economic security, accelerating growth and productivity, and making sure the proceeds of growth are shared fairly - a continuation of the Government’s long-running ‘levelling up’ focus. The Statement contained a number of measures targeted at helping people, as we look ahead to an unforgiving April for household budgets.

Economic forecasts

The Spring Statement took place hot off the heels of the Office for National Statistics’ announcement that inflation rose to a 30-year high in February, hitting 6.2%. This rising inflation combined with the war in Ukraine and disruptions to global supply chains and energy markets means that significant headwinds are hitting the economy. It is therefore no surprise that the latest Office for Budget Responsibility (OBR) forecasts predict slower economic growth this year and next compared to those given at the Autumn Budget last year.

OBR and Barclays GDP forecasts

  2022 2023 2024 2025 2026
OBR forecast from October 2021 6.0% 2.1% 1.3% 1.6% 1.7%
Latest OBR forecast from March 2022 3.8% 1.8% 2.1% 1.8% 1.7%
Barclays forecast from October 2021 4.2% 1.3% - - -

The economic forecasts, alongside the sobering warning that the current environment means there is an unusually high degree of uncertainty around the economic outlook, provided the backdrop for a more fiscally restrained Statement. Whilst the UK’s underlying debt is expected to fall from 83.5% of GDP in the next financial year to 79.8% in 2026-27, the Chancellor also warned that spending on debt interest is set to rise to its highest on record at £83 billion next year and that the OBR believes the UK’s fiscal headroom could be “wiped out” by relatively small changes to the economic outlook.

This was therefore a carefully balanced Statement, with Rishi Sunak offering some new measures to support households, but also maintaining the need to meet his fiscal rules with a margin of safety in preparation for the event that public finances could worsen significantly.

How does the OBR produce its forecasts?

The Office for Budget Responsibility (OBR) was created in 2010 to provide independent analysis of the UK’s public finances. It is tasked with producing detailed five-year forecasts for the economy and public finances twice a year, which accompany and inform the Government’s Autumn Budget and Spring Statement.

The OBR uses a large-scale macroeconomic model for the production of its economic forecast, which is jointly maintained and developed by HM Treasury and the OBR. It works with various Government departments to gather numerous separate forecasts for different categories of revenue, spending and financial transactions, which it then collates and uses to generate aggregate forecasts for spending and tax receipts and for the various measures of public sector borrowing and debt.

Building a more secure economy

After reflecting on the situation in Ukraine and the implications of Russian sanctions, the Chancellor linked the UK’s security to the strength of its economy. He stated that the Government wants to provide security through more resilient public finances and security for working families by helping with the cost of living. The Chancellor set out three measures aimed at supporting households immediately.

The first of these is a cut to fuel duty by 5p per litre, effective from 6pm on Wednesday 23 March and lasting until March 2023. Welcomed by motoring groups and campaigners, the RAC has estimated this will cut £3.30 off the average cost of a tank of petrol.

The second is an extension of the VAT relief available for the installation of energy saving materials, such as solar panels and insulation. In recognition that energy efficiency makes a difference to energy bills, the Government wants to help homeowners install energy efficient devices and so is extending the VAT relief to additional technologies, removing the complex eligibility conditions, and increasing the relief further by introducing a time-limited zero rate for installation.

This is in addition to the announcement already made that all domestic electricity customers in England, Scotland and Wales will receive a discount of £200 on their energy bills, paid for by the Government in full, from October 2022.

However, with the OBR forecasting an increase to energy bills of a further £830 a year from October, consumer groups and fuel poverty campaigners remain concerned that the most vulnerable households will struggle to meet rising electricity and gas bills. The Prime Minister is set to announce further measures on long-term energy security as part of an energy supply strategy due in the coming weeks.

Lastly, the Government has doubled the household support fund to £1 billion to help the most vulnerable households with the cost of essentials such as food, clothing and utilities.

Accelerating growth and productivity

A key plank of the Chancellor’s new tax plan^ - published alongside the Spring Statement - is creating the right conditions for higher growth. The Government has framed its reforms around three themes - people, ideas and capital - and intends to work with businesses over the summer to maximise the benefits from its interventions.

On people, the Government believes that the UK lags behind international peers in adult technical skills. It therefore wants to look at whether the current tax system, including the apprenticeship levy, incentivises businesses to invest in the right kind of training, or whether further intervention is needed to encourage employers to offer high-quality employee training.

In an effort to boost the UK’s rate of innovation - which the Government views as explaining almost all of the country’s productivity gap with the US - the Chancellor announced reform to R&D tax credits so that they’re more effective and better value for money. This will include expanding the generosity of the reliefs to include data, cloud computing and pure maths, with further reform on the horizon, subject to a Government review in the Autumn.

Lastly on capital, the Government views weak private sector investment as a longstanding cause of the UK’s productivity gap internationally. It aims to fix this by cutting the tax rates on business investment in the Autumn Budget later this year, subject to consultation with businesses on the best way to do this.

Given that these plans all involve a period of consultation with businesses before final decisions on the future business tax plan are unveiled at the Autumn Budget, the Chancellor also announced a number of measures to support smaller businesses in the immediate term.

Alongside the business rates discount for retail, hospitality and leisure businesses that takes effect in April, the Government is increasing the Employment Allowance to £5,000. The change, which HM Treasury claims is a tax cut worth up to £1,000 for half a million small businesses, will come into effect in two weeks’ time. In addition, and to support the Government’s net zero objectives, the Government are bringing forward an exemption on business rates for green technology. Solar panels and heat pumps will be exempt from business rates from April 2022, predicted by HM Treasury to save businesses an extra £35 million in 2022-23 and to amount to around £170 million over the next five years to support the decarbonisation of buildings. A 100% relief for eligible low-carbon heat networks which have their own rates bill will also be available.

Helping families and levelling up

Following the Government’s commitment in its 2019 election manifesto that it would increase the National Insurance contributions (NICs) threshold, the Chancellor announced an increase to the NICs threshold by £3,000, bringing this in line with the income tax personal allowance. By fully equalising the NICs and income tax thresholds, from July individuals will be able to earn £12,570 a year without paying income tax or National Insurance. Whilst HM Treasury calculates this as a £6 billion personal tax cut for 30 million people, it will be offset against the new Social Care levy which comes into effect in April.

In order to meet the third objective of the new tax plan - ensuring that the proceeds of growth are shared fairly - the Government announced that the basic rate of income tax will be cut from 20 to 19 pence in the pound in 2024. Finally, the Chancellor pointed towards the OBR’s expectation that inflation should be back under control by 2024, allowing the Government to cut income tax before the end of this Parliament.

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