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Sunak looks to the long term

Would Rishi Sunak save his windfall from the better-than-expected state of the nation’s finances and use it to pay down debt, or would he break into the extra billions bagged to shield households and companies from a cost-of-living/doing-business crisis? 

In the end he chose not to postpone or rethink his plans for the Health and Social Care Levy. Instead he lessened its impact by announcing a £3,000 rise in the NI contribution threshold to align this with the income tax starting point which means that millions will pay no tax on the first £12,570 of their earnings, and that a tax cut will be delivered to many low and middle earners.  

The second rabbit out of the hat was the promise of a cut in income tax by the end of this parliament (giving back some of the extra tax we will be paying by then). But the thrust of the speech was all about the importance of driving growth, accelerating productivity, closing the gap with peers and securing and rebuilding the state’s financial resilience.

It’s not often that chancellors of the exchequer are faced with such stark circumstances ahead of a statement on the nation’s finances. Being accompanied all the way to the despatch box by a very vocal crowd demanding particular actions. 

The government could not deny that while pressure is being piled on businesses and households, it has won some fiscal headroom. Borrowing so far this year has come in around £26bn below forecasts while tax receipts are in 'surplus' to the tune of around £130bn largely because of Sunak’s decision a year ago to freeze tax allowances and bands, a move that has been further helped by inflation. The Treasury has also been in capital gains tax (CGT) clover as people and businesses get on with their selling plans to avoid the higher rates they suspect may lie ahead. Indeed, supporting the view that personal taxes may be subject to significant change in the coming years, the government stated in the Spring Statement documents that it is looking at reforming tax reliefs and allowances.

But healthier public finances are not the only thing to be weighed up. Sunak reminded the nation of the costs of its borrowing – debt interest this year at £83bn is four times what it was a year ago, and servicing this debt could become costlier still. The public sector wages bill may need to rise, too. Tax receipts may drop – accountant RSM highlights that a slowdown in City dealmaking would mean that the CGT gravy train could soon come to a "juddering halt”, at least until economic uncertainty clears.

Above all the war in Ukraine has added to the difficulties. It presents a real risk to world stability and has significantly increased global and national uncertainty. The UK’s fiscal headroom, said Sunak, could be wiped out “by relatively small changes to the economic outlook”, and that borrowing more “would not be cost or risk free”.

So there are lots of reasons to keep his powder dry for battles and challenges ahead.

The truth is we cannot have our cake and eat it. Do we or don’t we want to increase funding of the healthcare system? Do we or don’t we want to pay more tax? Rachel Reeves, shadow chancellor, complained to Sunak in her response that he had put up taxes on people’s families and businesses “a staggering 15 times”, raised taxes “more in the last two years than any previous chancellor in the previous 50”, and had failed to scrap his National Insurance hike. She did, however, highlight that he had not imposed the one tax she did approve of – a windfall tax on energy companies.

We should approve in these unpredictable times the focus on strengthening the economy and public finances. The UK badly lags its peers in technical skills, vocational qualifications and R&D. These are serious problems and they are likely to worsen given inflation, higher rates of corporation tax and likely further dents in confidence. I would have preferred a pledge to keep the Super Deduction tax, to the promise of a £5bn tax cut in 2024. Let’s hope that Sunak’s replacement plans for the relief are as generous and as simple.