Nine things to watch for in the chancellor’s Spring Statement 2022

On Wednesday 23 March, chancellor Rishi Sunak will present a Spring Statement to the House of Commons. What could we expect him to focus on this time, and what surprises might he have up his sleeve?

The Spring Statement is not billed as a full-blown Budget containing major tax or spending overhauls (that normally happens in the autumn), but an update on progress since then and the state of the UK economy.

However, the rising cost of living and the economic impact of the war in Ukraine here in the UK is likely to result in this Spring Statement taking greater prominence than planned.

It’s also an opportunity for the chancellor to amend or extend existing policies and to launch consultations on ideas in the pipeline.

The starting point for Sunak will be a set of forecasts to be published that day by the Office for Budget Responsibility (OBR), looking at prospects for the UK’s spending, debt, economic growth, jobs and inflation.

This Spring Statement is actually the first since 2019. Special Covid support plans disrupted the normal scheme of things in 2020 and 2021, with full budgets in both spring and autumn last year.

This year, too, it’s likely to be an important day for Brits and their money, not just because we get the latest update on the economy and public finances, but because the chancellor is likely to make further announcements on policies that could affect millions of people’s finances, for better or worse.

On the one hand, the cost of living is spiralling, fuelled by the knock-on effects of war in Ukraine and Russian sanctions. On the other, Sunak is pushing to rebuild coffers massively depleted by the government’s Covid support schemes.

So what might we expect to hear on 23 March? There has been little indication so far of exactly what Sunak is likely to do, but various possibilities are on the table.

1) Measures to ease inflation pressure

With inflation now standing at 5.4% and expected to top 8% in coming months as a result of the Ukraine war, the Resolution Foundation says average households could be £1,000 a year worse off in real terms - “the sharpest annual income fall since the mid-1970s”.

As a consequence, the chancellor is under a lot of pressure – including from prime minister Boris Johnson – to come up with further measures to help households in the Spring Statement.

Sunak has already announced a £9.1 billion package to provide a repayable £200 rebate per household from October to ease soaring energy bills, and a £150 refund for homes in council tax bands A to D in the UK.

The Resolution Foundation says benefit payments and the state pension should be increased by a further 5% this April, and then trimmed back again in 2023 when automatic increases have caught up with inflation, to protect poorer families from “a living standards roller coaster over the next two years”.

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2) Windfall energy tax 

Other possibilities to help limit the damage done by rampant inflation include scrapping 5% VAT on domestic energy bills, possibly limited to lower-income households, and a windfall tax for oil and gas companies.

Labour suggests these measures could help fund a higher Warm Home Discount against energy bills for vulnerable families (it’s currently £140, rising to £150 next winter) or make the Warm Home Discount much more widely available.

Jon Hickman, a corporate tax partner at BDO, makes the point that although few Tories are likely to back such an ‘un-Conservative’ move, the government has made some last-minute changes to the current Finance Bill, aiming “to block energy companies ring-fencing assets in a way that might have created more risk of triggering government support action”.

He adds that it is likely that a windfall tax would be electorally popular and echo action in other countries – “so it can’t be ruled out completely”.

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3) Petrol duty

With petrol and diesel prices continuing to hit all-time highs as sanctions against Russian oil bite, the RAC is urging the chancellor to cut VAT on fuel to 15% from 20% – a move backed also by senior Tories including Robert Halfon, according to the Financial Times.

Average prices rose to over 160p per litre for petrol and 170p for diesel on Thursday 10 March, according to data firm Experian Catalist.

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4) National Insurance contributions

Sunak has confirmed NICs will rise by 1.25% for employed people, employers and the self-employed in April, with the £12 billion of proceeds being used to fund the NHS’s recovery from the pandemic and then to close the gap between health and social care funding.

But in light of the inflationary onslaught set to hit consumers and businesses in coming months, business leaders as well as Labour MPs and some on the Tory right are calling for him to scrap this, or at least delay its introduction.

The Office for National Statistics (ONS) has found that public sector borrowing has come in at around £13 billion below the OBR forecast for this year, which gives the chancellor some wiggle room to increase public spending and still stay within his limits. Coincidentally, the sum in hand is about the same as the amount that would be raised by the planned NIC rate hike - so one suggestion is that it could be used to defer the increase for a year. 

However, Hickman suggests the chancellor might instead “just decide to ‘adjust’ it to reflect cost of living concerns. For example, he could choose to reduce the ‘normal’ rate of NIC for those on lower earnings so that they pay the levy but see no net difference in their take home pay from April – but this would most likely need to be balanced with NIC increases on high earners.”

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5) Capital gains tax

It’s possible that the chancellor could bring CGT into line with income tax. A plan was drawn up by the Office of Tax Simplification in 2021, which would simplify the system and raise an extra £14 billion in tax annually.

But Hickman thinks it’s unlikely that he’ll make many tax changes. He points out that he “has had the opportunity to overhaul both CGT and IHT and chose to stay well clear of fundamental changes to either in the last Budget”.

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6) Wealth tax

It’s also possible that we see the introduction of a one-off ‘wealth tax’ to help pay for the cost of pandemic support measures. Again, though, Hickman is sceptical: “The chancellor is not a supporter and even proposing one may be a bad career move,” he comments.

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7) Pension tax relief

Following last year’s freezing of the pension lifetime allowance (as well as the income tax, inheritance tax and CGT thresholds), there’s been speculation that Sunak might have pension tax relief in his sights.

At the moment, pension savers receive full tax relief on contributions, but it’s possible he might reduce the tax break or even remove it altogether.

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8) Defence

Given what’s going on in Eastern Europe, there is a lot of pressure on the chancellor to allocate any spending increase to boosting the defence budget and supporting Ukraine with lethal aid. The shadow defence secretary John Healey has told Sky News that he expects a "big boost to defence" in the Spring Statement.

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9) The business super deduction

As far as business measures are concerned, the CBI is calling for the chancellor to make permanent the attractive tax incentive for business investment. Under the super deduction, companies can currently claim back up to 25p for every £1 invested in 'qualifying' machinery and equipment, but the deal ends in April 2023.

The CBI research suggests making the tax break permanent could trigger an annual 17% increase in capital spending and boost UK business investment by up to £40 billion a year by 2026. As things stand, it says, the risk is that the super deduction will end just at a critical time for the economy.