Chancellor Rishi Sunak used his Spring Statement to only partially offset the squeeze on real incomes.
He announced an £8.4bn net fiscal giveaway, as cuts in fuel duty, support for energy bills and an increase in the income level at which people start paying national insurance offset increased student loan repayments.
However, April’s increase in the energy price cap will cost households over £15bn. And the rise in National Insurance contributions (NICs) will cost them a further £16.5bn, which, says Kemar Whyte, an economist at the NIESR, would "place significant pressures on households at a time of high inflation”.
This rise in NICs, allied to real-terms cuts in departmental current public spending, means that fiscal policy will tighten. The Office for Budget Responsibility (OBR) foresees cyclically-adjusted net borrowing falling from 6.1 per cent of GDP to 4.4 per cent in 2022-23, a tightening equivalent to 1.7 per cent of GDP.
Despite this, the OBR remains optimistic about the economy. It envisages real GDP growing by 3.8 per cent this year. Although well down on its autumn forecast for 6 per cent growth, this is almost twice the growth rate the UK has averaged in the last 50 years.
One reason for this optimism is that it expects business investment to grow by 10.6 per cent this year, as companies take advantage of temporary investment tax allowances and catch up on projects they postponed during the pandemic. But it has a track record of over-predicting such capital spending.
Also, it believes the squeeze on real incomes will not hinder consumer spending. Although it expects households’ real disposable incomes to fall by 1.5 per cent this year (the third-largest drop since World War II) it expects consumer spending to rise by 5.4 per cent after inflation, the sixth-largest rise since WWII. This is because it foresees the household savings rate more than halving this year to 4.4 per cent, its lowest level for over 60 years. Some households, it believes, will run down the cash balances they built up during the pandemic, while others will just borrow more.
If the economy is to do well this year, it will be because of increased household borrowing, not increased government borrowing.
This, however, is only likely if people believe the squeeze on their incomes will be only temporary, and if they return to their pre-pandemic habits of high spending. Both are doubtful.
These forecasts are founded upon the assumption that the Russo-Ukraine war will do no great harm to the world economy. The OBR assumes that the world economy will expand by 3.9 per cent this year – thus sustaining demand for UK exports – and that oil and gas prices will not rise further. The OBR assumes oil will average $94 (£71) per barrel in 2022-23 - $26/bbl less than its current level – and that gas will average £2.80 per therm, around its current level. Should these assumptions prove mistaken, however, the OBR’s confidence that the economy can cope well with the squeeze on households’ incomes will be misplaced.
