- UK public sector net debt amounted to 94.9 per cent of gross domestic product in January
- The most likely measure is a reduction in fuel duty for petrol and diesel drivers
With the chancellor’s spring statement nearly upon us, it may be worth examining how much latitude Rishi Sunak has in relation to public finances and the potential implications for investors. We’re not usually privy to tax and spending decisions in the “mini-budget” statement, although circumstances may well have forced his hand on several issues. Defence spending is doubtless under consideration, a potential boon for investors in the sector, although changes in this regard normally follow in the wake of a strategic review. For the moment, he is charged with keeping a lid on the deficit, while simultaneously dampening inflationary pressures without choking off economic recovery.
This task is made even more difficult due to the government directive that the Bank of England should target a 12-month increase in the Consumer Prices Index of 2 per cent. That still seems absurdly ambitious even after the Monetary Policy Committee opted to raise the base rate by a quarter percentage point to 0.75 per cent. Consumer and industrial input prices have been driven by supply chain disruptions and pent-up demand following the reopening of the economy in 2021. That wouldn’t have come as much of a surprise for economists, although Russia’s invasion of Ukraine has changed the equation, with the International Energy Agency warning that the world could be faced with the biggest energy supply crisis in decades.
Sunak was handed the reins of the economy a few weeks prior to the first lockdown, so he’s never had the chance to formulate fiscal policy against what might be termed a stable economic backdrop. And it may be that it is simply unfeasible to achieve this balancing act in the near term. Even though government borrowing has been falling ever since it reached a peacetime record in 2020/21, the raw numbers are certainly not working in his favour.
UK public sector net debt amounted to 94.9 per cent of gross domestic product (GDP) as at January 2022, the highest it has been since 1963, the year in which the Beatles scored their first No. 1 hit. At that time, the national GDP growth rate stood at 4.9 per cent, whereas the UK had been trundling along at 1.7 per cent in the year prior to the pandemic. Admittedly, that’s coming from a much larger base, but in 1963 the UK was already transitioning away from traditional heavy industries and it would be another 43 years before the country paid off the debts it accumulated in World War II, although at least nobody thought that the economy would be best served by placing it in a self-induced coma back then.
It’s also worth remembering that household debt as a proportion of GDP has soared since the 1960s, no doubt partly a reflection of credit-fuelled consumption, but also because of much higher rates of home ownership. When you look at household debt as a proportion of disposable income, statistics show that we’re in better shape than we were in the aftermath of the 2008 global financial crisis, although there is every chance that the chancellor will eschew budgetary discipline as fears mount over the prospect of stagflation, especially given that we can’t be sure how long the supply-side issues in energy markets are likely to persist.
Support measures already include the Energy Bills Rebate – an upfront discount on households’ energy bills worth £200, repayable in annual £40 instalments from 2023/24. But given the limited options at the chancellor's disposal, what could he probably announce from the dispatch box on Wednesday, 23 March?
- Perhaps the most likely measure is a reduction in fuel duty for petrol and diesel drivers, or perhaps on the rate of VAT charged on fuel. Sunak may well have already flagged his intentions, albeit with the caveat that he won’t be able to fully offset the 14p hike on a litre of fuel since the beginning of March. We could be looking at a temporary 5p reduction in the duty rate, a move that some parliamentarians have already said will have limited impact on the cost-of-living crisis. A formal petition has been put to parliament requesting a 40 per cent reduction in fuel duty and VAT for two years, although that seems rather fanciful.
- Shareholders in the UK oil majors are right to be concerned that the chancellor might entertain the idea of a windfall tax on energy producers. You can see how the idea might prove attractive from a political standpoint, but Ukraine notwithstanding, you could argue that broader industry themes are at the heart of the crisis. At any rate, any punitive raid would seem a bit harsh on shareholders in BP (BP.) who already on the hook for a hefty impairment on the Rosneft (RU:ROSN) stake it was effectively forced to sell. The reality is that any tax on 'excess profits' (whatever that means) would deter energy companies from making future investments, the main reason we are where we are on the energy front.
- A decision to reverse or delay the planned increase to National Insurance would be welcomed by almost everyone, not least of which Conservative party members given that it fundamentally breaches the election manifesto. It would be of greater benefit to those industries that are still being negatively impacted by the pandemic and the resultant supply chain disruption. Farming and hospitality readily spring to mind. The chancellor could also conceivably raise the threshold, as it is widely appreciated that those on lower incomes are disproportionately affected by inflation.
- The government could decide to keep the housing market chugging along by reforming stamp duty. We saw the positive impact on volumes during the pandemic, although above-average increases in house price inflation have resulted in anomalies in the market. Many regular suburban houses in London are now worth more than £1.5mn, meaning they attract a 12 per cent surcharge. In recent years, buy-to-let landlords have been hit by a raft of disincentives, including changes to mortgage interest relief changes and the introduction of the 3 per cent stamp duty surcharge. Little surprise then that the stock of properties within the private rented sector has continued to decrease, so pressure is mounting for the government to permanently scrap the surcharge.