Laith Khalaf, head of investment analysis at AJ Bell, comments:
“There’s always the question of whether the Chancellor will pull any rabbits out of the hat when he stands up at the despatch box, and today we got a couple of giant Harvey-sized pookas appearing in the form of an effective cut to both income tax and National Insurance.
“The Chancellor has been presented with a £20 billion windfall from higher tax receipts and student loan reforms, and he’s chosen to spend half of that in tax giveaways and used the rest to pay down debt. The Chancellor’s personal tax cuts could be construed as a U-turn, as he’s effectively moderated the effects of tax rises announced last year. He’s been smart by not doing it directly, using tax rates and tax thresholds to offset each other. Last year he froze income tax allowances, and now he’s going to cut the income tax rate in 2024. In a mirror image, last year he increased the rate of National Insurance, and now he’s pushed up the threshold at which it is paid. In both cases the result is to take the edge of those big tax rises announced last year, without getting egg on the Chancellor’s face from backtracking in an obvious fashion.
“The approach of using half the windfall to pay down debt, and half to help out with the cost of living is a balanced and sensible one. The government will pay a record £83 billion in debt interest next year, thanks to rising interest rates and inflation. That will exceed the day to day budget of schools, the Home Office and the Ministry of Justice combined, which shows precisely why it’s important to keep debt under control. To that end the Chancellor is on course to meet his fiscal rules, with some headroom to allow for the heightened uncertainty given the situation in Ukraine.
“Unfortunately though, the Chancellor’s largesse isn’t going to totally bail out household budgets from the approaching inflationary onslaught. The OBR now expects inflation of 7.4% this year, and 4% next year, which means £1 in your pocket at the beginning of 2022 will be worth just under 90p by the end of 2023, assuming the forecasters aren’t under-egging the inflationary pudding. And while the Chancellor’s increase in the National Insurance threshold will definitely help to offset the new health and social care levy, especially for lower earners, income tax thresholds are still frozen from April. Taxpayers therefore can still expect a rising income tax burden, at least until the rate is cut to 19% in 2024.
“Overall the measures announced in the Spring Statement look positive for consumers, but against the backdrop of the tax rises announced last year, they only alleviate some of the pain the Chancellor has already inflicted. The OBR calculates the tax cuts in the Spring Statement offset around a quarter of the personal tax rises announced last year. Essentially for every £4 the Chancellor took off taxpayers last year, he’s saying we can have £1 back. Looking at the combined effect of personal tax changes announced since last year, taxpayers are still considerably out of pocket.”