When Rishi Sunak steps in to deliver his spring statement this Wednesday, many households and businesses across Scotland will be listening intently amid the current cost of living crisis.
Former Prime Minister Gordon Brown warned this month that millions could be pushed into fuel poverty as the UK faces the worst such crisis “for half a century” and he urged Mr. Sunak to use his statement to calm the situation. Businesses, which are just starting to get back on their feet after the pandemic, are also facing a huge rise in bills which will no doubt have a significant impact on their fragile recovery.
Whatever your political allegiances, it’s hard not to feel some sympathy for the Chancellor given the unprecedented times we’ve been through during his tenure. He first faced the daunting task of juggling huge levels of government spending and a massive drop in the tax base due to the pandemic. And now he must try to balance the books during a cost-of-living crisis, when the potentially huge economic implications of the war in Ukraine are still unclear.
What can we expect on Wednesday? Well, the House of Commons will probably hear a lot about the challenges these two huge issues are creating for our economy and how they have affected UK growth and inflation forecasts.
One of the biggest questions will be what Mr. Sunak will do, if anything, to help households and businesses facing these rising costs.
Last month he announced a £350 aid package to take the ‘sting’ out of rising customer bills. There was speculation he could go further and announce more support for struggling families when he told the Tories’ Spring Forum in Blackpool on Friday that he had ‘tremendous sympathy’ for those affected, adding that “where we can make a difference…I will always do that”. Whether he deems such measures affordable remains to be seen, so soon after the UK government spent several billion pounds on Covid support.
Nevertheless, a business-friendly statement would, in general, be very welcome given the rising costs in a number of areas, including energy, raw materials and logistics, not to mention the likely impact that the reduction consumer spending will have on many businesses. as members of the public tighten their belts.
One option for the Treasury could be to consider adopting a similar approach at the start of the pandemic, offering support such as putting in place capital vacation periods on companies that have taken out the loan program for the business interruption (CBILS), or make government-backed recovery loans available again and reintroduce interest rate relief for businesses. Businesses need a degree of flexibility and support, and the Treasury is likely to be cautious as the full fallout from the pandemic has yet to be seen for many businesses.
The challenge for Mr Sunak will be determining what is affordable, given that higher interest rates will also drive up borrowing costs for government spending.
A number of business leaders, including more recently Scottish entrepreneurs Sir Tom Hunter and Lord Willie Haughey, have called for the planned 1.25 per cent rise in National Insurance to be postponed or halted. It is difficult to envisage the total cancellation of these increases. However, the Treasury may seek to change the way it is implemented, such as initially targeting the increase only to employers and higher rate taxpayers.
There has also been speculation over whether Mr Sunak will introduce a windfall tax on North Sea oil and gas companies. The UK Government does not appear to have much support for this view at present and has already argued that this would have a negative impact on investment in this sector when it wishes to encourage domestic energy production, particularly in the context of of the Ukrainian crisis. But the fact that such a tax would likely be popular with the electorate – given the significant increases in energy costs – means that such a move should not be completely ignored.
The Chancellor is also coming under heavy pressure within his own party over the rising cost of fuel for motorists, with more than 50 Tory MPs signing a letter demanding a cut in fuel taxes. Although Mr Sunak has been warned not to follow the spring declaration too much, he made positive noises about it over the weekend and could implement initiatives that mitigate the impact by continuing to freeze fuel duty or by temporarily waiving the VAT charged on fuel.
After the pandemic sparked borrowing to levels not seen since World War II, it’s generally accepted that taxes will have to rise at some point to cover all that borrowing, but we’ll have to wait and see who bears the brunt and whether the Chancellor will delay some of the biggest tax hikes.
He has already warned that the government cannot “fix all the problems” and I’m sure he understands that his announcements will never be popular with everyone. Only he knows how far he will go when he shows up at the dispatch box on Wednesday.
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