Chancellor of the Exchequer Rishi Sunak laid out plans to ease the pressure of rising inflation on families in today’s Spring Statement (23 March), with measures including cuts to fuel duty and an increase in the threshold for paying National Insurance tax.
The Chancellor made the statement as inflation hit its highest rate in 29 years. This morning the Office for National Statistics (ONS) revealed price inflation reached 6.2% in February, higher than the figure of 5.9% that had been predicted by economists.
Inflation is set to rise even further. The Office for Budget Responsibility (OBR) predicts inflation will average at 7.4% this year, with a peak of 8.7% in the final quarter. This figure does not fully consider the impact of the Ukraine war, Sunak noted, which means inflation could be even higher. Last week the Bank of England said inflation could hit double-figures this year.Inflation will separate the strong marketing companies from the weak
“We should be prepared for the economy and public finances to worsen, potentially significantly,” Sunak told Parliament.
On the subject of the Ukraine war, he said the UK was imposing sanctions of “unprecedented scale and scope” on Russia. He added that these actions were “not cost free for us at home”, but that the government would take decisive economic action to ensure financial as well as military security.
Another event that may drive inflation up is the energy price cap rise. At the beginning of April, the amount that energy companies are allowed to charge will be increased. As well as driving up inflation, it will increase the cost of living for households and mean consumers have less expendable income.
Amid this storm of worries, UK consumer confidence hit its lowest score in 13 months last month, according to GfK’s Consumer Confidence Barometer. Consumers’ willingness to make major purchases dropped by five points to a dismal score of -15. Consumer confidence plummets amid ‘perfect storm of worries’
Meanwhile, the British Retail Consortium (BRC)’s Price Index figures show food inflation has risen slower than the headline figure, suggesting retailers are “successfully managing to limit cost increases for many essential groceries”, according to BRC CEO Helen Dickinson.
However, retailers are nonetheless “struggling” to absorb higher costs, she said, indicating that shop prices are likely to rise in the coming months.
With that in mind, measures to ease inflationary pressures and reduce the cost-of-living squeeze could play a key role in keeping demand up and helping brands stay afloat this year.
Transport saw the highest rate of inflation across all categories in 2022. As such, Sunak announced a cut to fuel duty aimed at helping motorists facing rising petrol and diesel prices. The duty will be cut by 5p a litre and will be in place until March 2023.
Another central measure to be introduced is a rise in the National Insurance threshold, which aims to reduce the pressures of inflations on households. The amount that people can earn before they are taxed will rise to £12,750 in July. The government said this change is worth £6bn.
Supporting growth through businesses
Amid inflation, the OBR has slashed its growth predictions for the UK economy. The economy had been forecast to grow by 6% in 2022, but that figure has been revised to 3.8%. The economy is then forecast to grow by 1.8% in 2023 and 2.1% in 2024.
The Chancellor said he wanted to encourage growth by supporting British businesses.‘Strong brands always win’: Why marketing investment is crucial to survive inflation
A previously announced cut in rates for small businesses was confirmed. Qualifying businesses in the hospitality, retail and leisure sectors will see their rates cut by up to 50%. The Employee Allowance is also being increased by £1,000, something which the Government say will benefit half a million SMEs.
However, Dickinson said that while the announcement on rates will be welcome to the small retail businesses that qualify, it “will have little impact on the industry’s £8bn business rates bill”.
Unemployment has fallen to 3.9% and the OBR forecasts it to drop each year. Sunak said that people and upskilling were priorities for the Government, noting that UK employers spend half the European average on training their employees. He committed to looking at how the tax could work to encourage businesses to invest in adult training, including apprenticeships.
In October, Sunak promised to drive a “skills revolution” with an overall investment of more than £2bn. Around £550m is to be invested in adult skills through the Skills Fund by 2024-25. This fund offers short courses and “skills boot camps” for adults who have no qualifications beyond GCSE level.
On top of that, there will be a further £170m allocated towards apprenticeships and training.Marketing trade bodies lament government’s ‘missed opportunity’ to address skills crisis
Tax cuts were also central to the Chancellor’s agenda, but he said the Government is taking a “principled approach” to these cuts against its policy of cutting borrowing and debt.
The plan for tax cuts spans over several years, and in 2024 the Government says they plan to cut income tax for the first time in 16 years. The planned cut would see basic income tax cut from 20p to 19p.
While Sunak did note that the OBR had not been able to fully account for the economic impact of the Ukraine war, he said the body had forecast that inflation will return to manageable levels by 2024.