Page 3 - Spring Statement - March 2022

Inflation, confirmed to be at 6.2% in February, is more than a cost-of-living-crisis political problem for the Chancellor.
It has also thrown a large spanner into the carefully crafted calculations of his two 2021 Budgets:

• The freezing of many allowances and tax bands through to April 2026 now looks a much more brutal tax increase
than originally appeared. For example, in March 2021, the Office for Budget Responsibility (OBR) projected that
the personal allowance and higher rate tax threshold freezes would yield £8.2bn a year by 2025/26. Last week the
Institute for Fiscal Studies (IFS) calculated that on the latest forecasts that figure could be as much as £21bn. The
impact is already showing up in PAYE income tax receipts, which 11 months into 2021/22 were 13.6% (£20.3bn)
above the corresponding figure for 2020/21.

• Last October’s Spending Review set cash expenditure amounts for 2022/23 to 2024/25. Higher than assumed
inflation devalues the departmental budgets and leaves the government with the awkward fact that not uprating
these amounts means a drift back towards austerity. A good example of the problem will be public sector pay,
which on average has shown no real growth since 2010, according to the IFS.

• The £500bn plus of index-linked gilts, which looked like virtually free borrowing a year ago, is now a millstone with
the RPI inflation which they track running at 8.2% (February 2022). In 2020/21 the government spent £23.6bn on
debt interest. For 2021/22 the OBR reckons the cost will be £53.5bn, a 127% increase. 2022/23 sees a further 55%
jump to £83.0bn, which, as the Chancellor noted in his speech, is a near quadrupling over two years.

During the pandemic the Bank of England rode to the Treasury’s assistance with £450bn of quantitative easing
(QE) and a 0.1% base rate. Now the Treasury may feel the Bank is working against it, with increases in base rate
and a gradual unwinding of QE. Both are counter-inflationary measures, but the former reduces the financial
benefits of QE for the public finances while the latter removes the largest buyer from the gilts market. That
matters when the Treasury has £125bn of gilts to sell in 2022/23.

• Real earnings, i.e. earnings adjusted for inflation, are set to fall. Even the much-trumpeted 6.6% rise in the
National Living Wage next month will be short of April’s inflation rate. The OBR reckons that real wage growth will
be -2.0% in the first quarter of 2023 after inflation peaks at 8.7% in the previous quarter. Add in the covert income
tax rise from frozen allowances and overt NICs increases and Joe and Josephine Public will feel considerably
poorer. The result will be slower growth. In October the OBR was projecting 6% growth in 2022 and 2.1% in 2023
in its economic and fiscal outlook (EFO). The corresponding figures in the latest EFO are 3.8% and 1.8%. Less
growth means less tax revenue.

The day before the Spring Statement the public finance figures showed the Chancellor still to be on course to
undershoot the OBR’s October 2021 borrowing forecast by over £25bn. The expectation was that he would hold back
most, if not all of that bounty for tax cuts ahead of the next election, due by the end of 2024. The Spring Statement
proved that assumption both right and wrong…

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