Spring Statement 2022: economics comment
“A small Statement with big electoral ambitions”, Yael Selfin, Chief Economist at KPMG UK, comments on today’s Spring Statement announcement:
“A small Statement with big electoral ambitions”, Yael Selfin, Chief Economist at KPMG UK
“The Chancellor is relying on OBR forecasts that were relatively optimistic on economic growth from next year, with the risk of further escalation of the conflict between Russia and Ukraine lowering growth in 2022 too. This would make it trickier for the Chancellor to meet his fiscal target, and leaves limited room for further incentives for business investment and innovation - now expected in the Autumn Budget.
“The new OBR projections show that the Chancellor is still on track to meet his fiscal mandate in 2024-25 by a £27.8bn margin. Given the rolling nature of the targets, the Chancellor could still find the wiggle room to reduce the tax-to-GDP ratio ahead of the 2024 general election, as the target year is pushed back. However, this is still dependent on the economic outlook.
“Today’s tax cut announcements, however, including on the basic rate of income tax, do little to alleviate the rise in the tax-to-GDP ratio. The tax take is now projected to reach an eye-watering 36.3% of GDP, its highest level since the late 1940s.
“While faster growth since October has boosted public finances, a sharp deterioration in the economic outlook means that more spending is now needed to help households with rising living costs, alongside measures to support small businesses. This pushes up projected net borrowing in the current fiscal year by an extra £16bn.
“Limited additional help was offered to shelter households facing rising home energy prices, with the increase in the National Insurance threshold acting to offset some of the additional costs to working families.
“The reduction in the income tax rate was the Chancellor’s big surprise. While it will please voters ahead of the election, it will not help solve the country’s failing productivity performance. We will need to wait for the Autumn Budget to see what the Chancellor has in store for that.”
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