Sunday, March 13, 2022
When war is raging, it isn't the time for big tax hikes
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

In 10 days times Rishi Sunak will deliver his spring statement or, as the Treasury prefers to describe it, his spring forecast statement. Much has changed since the date for this event was announced just before Christmas last year.

What was intended to be a victory roll for the chancellor – celebrating the economy’s robust emergence from the pandemic, the success of the furlough scheme in holding down unemployment and the fact that the public finances are on the mend – has turned into something rather different.

The Russian invasion of Ukraine has hit business and consumer confidence, will push inflation even higher and intensify the cost-of-living crisis. Back in December, when the spring statement date was announced, the most recent forecast from the Bank of England, made in November, was that inflation would peak at about 5 per cent in the spring and then fall back quickly. If only.

It is now clear that we are in a very different situation, one in which inflation will peak at more than 8 per cent and in which the government’s vainglorious “fastest growth in the G7” boast will only work if other countries are hit even harder.

The big issue, of course, is what will happen to what have become some of worst-timed tax increases in history, next month’s increases in national insurance (NI) for both employees and employers and the freezing of income tax allowances and thresholds. Not only that, but the chancellor is under pressure to offer more direct help to households and businesses, and beef up defence spending.

More on that in a moment, first a little context. The spring statement occupies a curious place in the fiscal calendar. It is not intended to be a budget or a mini-budget and the Treasury has been unusually keen this time to make the distinction. It is to meet a legal requirement dating back to the 1970s, that two official economic forecasts are published each year. The actual budget will be in the autumn.

The previous spring statement was by Philip Hammond, the last chancellor but one, who was determined to have only one major fiscal event – the budget – each year. His was in March 2019, a year in which because of Brexit and the general election, there was, unusually, no actual budget.

Hammond’s March 2019 spring statement was his last hurrah as chancellor. In what now seems like a time of extraordinary calm, the then chancellor made announcements, particularly on extra public spending. These things come full circle. One highlight was the government’s strengthened commitment, with money attached, to the Oxford-Cambridge Arc, Britain’s Silicon Valley.

Latest reports, however, suggest the Arc is no longer ascending, with plans for an expressway linking the two ancient university cities and 1 million new homes put on the backburner.

What about this month’s spring statement? The government was criticised by the House of Commons Treasury committee because so many of the contents of the budget and spending review last October leaked out. I am not going to knock that but we shall have to see how much comes out this time.

There are, as noted, two questions. One is whether the chancellor presses ahead with his planned tax increases. The second is whether he introduces further specific measures.

I imagine last week’s announcement by the Irish government that it is making hefty cuts to the duty on petrol and diesel was greeted with less than joy in the Treasury. Fuel duty is a totemic issue for many Tory backbenchers, who would like to see their constituents similarly cushioned from the worst of the fuel price increases.

The cuts, the equivalent of 17p a litre off petrol and 12.5p off diesel, effective until the end of August, would not come cheap in the UK. By my calculations, they would cost more than £3 billion if implemented for only six months. Even for a chancellor who has persisted with the freeze in duty that has been in place since 2011 that is expensive.

A temporary cut in petrol and diesel duty would face a significant “re-entry” problem, with the motoring lobby arguing for new lower duties to be made permanent. It would also be impossible to do without further assistance for households.

It is wise not to pay too much attention to what Boris Johnson says, particularly on economic matters, but in prime minister’s questions a few days ago he was lauding the chancellor’s interventions so far, notably the £9 billion package announced last month, of a £150 council tax reduction for most households and a planned £200 energy price bill reduction in the autumn, to be paid back over the next few years. Mind you, he also defended the government’s shambolic response to the plight of Ukrainian refugees.

You have to feel some sympathy for the chancellor. He is under intense pressure to further ease the impact of the energy shock on the economy and may have made something of a rod for his own back by the effectiveness of his interventions during the pandemic. As well as this, the Institute for Fiscal Studies says the defence spending would need to rise by a quarter for the UK to remain the second biggest spender in Nato. The war in Ukraine makes last year’s integrated review of defence, security, foreign and development policy already look badly out of date.

That may also be the case for the new forecast from the Office for Budget Responsibility (OBR) which is what the spring statement was intended to be all about. Forecasting in the current situation of high but seesawing energy prices is like catching a falling knife. All around, independent forecasters are halving their growth predictions, with some predicting that growth will peter out completely by the end of the year. For the OBR, the need to meet deadlines, and show the Treasury its workings, probably means that the forecast has been pretty well put to bed by now.

Having said all this, the fundamental question for the chancellor is whether he would be raising taxes in these circumstances if not for the legacy of the pandemic. The answer to this, I think is a firm no.

Next month’s NI increase, which adds up to 2.5 percentage points, combining the employee and employer increases, a £12.7 billion tax hike, is mainly about funding he NHS’s post-pandemic catch-up. The freeze on income tax allowance and thresholds, which is intended to continue until 2026, is all about repairing the public finances after the costs of the pandemic.

Neither would suffer from a one-year delay, particularly as we emerge from another year in which the budget deficit has significantly undershot official forecasts. The NI increase has been constructed in a such a way that a one-year delay would be neater. From April 2023, NI will revert to previous rates, with the increase being labelled as a separate health and social care levy.

Will it be delayed? So far, the chancellor looks to have dug in, but external circumstances are changing by the day. This does not look like a good time to be inflicting a big tax increase on the economy. And one thing is clear. We will need to see more than just a statement on March 23.