This is not where Britain’s chancellor Rishi Sunak would like to be. This year was intended to be the start of the post-pandemic period of his chancellorship. Having spent huge amounts on coronavirus support programmes and then won the internal party arguments for funding higher, catch-up, spending on public services through tax rather than borrowing, he could now be the true small-state, low-tax Conservative he really is. The spring statement he will deliver on Wednesday, however, is likely to see him having to dole out fiscal largesse again. Whatever his qualms about state spending, that is the right thing to do.
Sunak will have room in the borrowing forecasts to spend and still meet his fiscal targets. While the Office for Budget Responsibility, the UK fiscal watchdog, is likely to downgrade its predictions of growth — thanks to the effects of higher oil prices on consumer spending power — the rise in inflation has also boosted tax revenues. Even before the latest surge in commodity prices, receipts were already coming in better than expected this year as the economy has rebounded rapidly from the coronavirus pandemic.
It is only the outlook for borrowing that has improved, however. Inflation is rising and growth is slowing. Like much of the rest of the rich world, Britain faces the prospect of stagflation and a deep squeeze on living standards. Scheduled increases in tax, to fund post-pandemic services, will further reduce households’ spending power. The Bank of England, too, is ahead of other major central banks in raising rates.
Earlier this year, before Russia’s invasion of Ukraine, Sunak announced a loan scheme to support those struggling with higher energy bills. Administered through the council tax bands, a system of local government tax based on house values and often not updated since the early 1990s, it could have been better targeted towards the most vulnerable. Nonetheless, the easiest and quickest way to help is to bring forward a scheduled increase in the universal credit benefit for the low-paid, raising it in line with forecast inflation now rather than later in the year.
Sunak’s experience during the pandemic has made him uncomfortable with “temporary” giveaways, believing they are difficult to unwind when times get back to normal. Accelerating an already scheduled increase in the benefit, therefore, should appeal to him. It will not increase, in the long run, the amount that universal credit recipients receive. The chancellor should also consider changing the loan scheme to a more straightforward rebate. However bad he believed the cost-of-living crisis was when he launched the scheme, it has become dramatically worse.
The same logic on the difficulty of unwinding temporary measures should apply to any plan to scrap, or cut, fuel duty. It would be politically popular, but a mistake. The rising price of energy provides a useful market signal to economise on a scarce resource and invest in fuel efficiency. The job of government policy should be to ease the transition rather than to dull the message that the country must reduce its dependency on fossil fuels.
Sunak is right that in the longer run any extra room in Britain’s fiscal plans should be devoted to lifting the rate of productivity growth — that is the best guarantor of more permanently improving living standards. Expanding capital spending allowances, which can be claimed back against corporation tax, would be a good first start. The chancellor will have to wait a while longer, however, to make clear the rest of his tax cutting plans for Britain.
Source: Financial Times