RUTH SUNDERLAND: The Chancellor’s big tax freeze is potentially far worse than the National Insurance hike and certainly more insidious
- Rishi Sunak had one of the most eventful chancelleries in modern history
- Russia’s attack on Ukraine will wreak havoc with arithmetic for spring statement
- Soaring inflation could easily torpedo Sunak’s popularity
Within two years, Rishi Sunak had one of the most eventful chancelleries in modern history.
No sooner had he moved into No 11 than the grim scale of the pandemic became clear. Now Sunak finds himself chancellor in wartime, thanks to Vladimir Putin.
Russia’s attack on Ukraine will upset the arithmetic of its spring statement next week. Even before the war, inflation had become a problem and now the outlook is much worse.
Under pressure: Rishi Sunak in two short years had one of the most eventful chanceries in modern history
Soaring inflation could easily torpedo Sunak’s popularity.
Those facing a major blow to their purchasing power include pensioners, whose state pensions will only rise in April by 3.1% after the triple lockdown was suspended. They also include his own ministerial colleagues, whose ministerial spending regulations have been reduced in real terms. Public sector workers, whose wages have lagged inflation for years, face another pressure.
And millions of employees are about to realize that they will suffer a painful five-year freeze on benefits and thresholds. This was announced a year ago and was too technical to do many waves. But people will realize how much it will hurt.
Rishi’s big tax freeze is potentially far worse than the National Insurance hike and certainly more insidious. This amounts to a huge stealth tax that will drag millions into higher brackets. Rising inflation makes the situation worse than it looked a year ago when it was announced. According to the Center for Economics and Business Research, it was originally expected to raise £8.2bn but could now raise £40bn. It’s a real ticking time bomb.
The measure seems difficult to justify because the inflation assumptions that supported it last year do not correspond to the reality of rising prices. Rishi should unlock the allowances – but probably won’t.
He cites the national debt of over £2 trillion, as well as our aging population and the legacy of Covid, both of which will skyrocket healthcare costs. Defense spending is likely to increase for obvious reasons.
Also, he would like to have a warchest to allow him to throw confetti before the next election, so he wants to replenish his depleted coffers.
What will he do in the Spring Declaration? Clues abound in his recent lecture But, whose themes were capital, people and ideas.
Looking through the twin crises of Covid and war, Sunak is concerned about the “Great Slowdown”: productivity, living standards and innovation are not advancing fast enough.
This could translate into an overhaul of research and development tax credits to get more for the Treasury budget and business investment incentives. Companies could also be encouraged to help their staff acquire new skills.
We may know more about how the UK can use the freedoms gained from Brexit to remove bureaucratic barriers to innovation in technology, life sciences and financial services, and over time. too.
However, one of the best things the government can do to boost business and help Rishi balance the books is to welcome Ukrainians who want to come here.
They could make an immense contribution, as did many Ugandan Asians who arrived in the 1970s with little more than clothes on their backs and became hugely successful in business and other fields. The same goes for the Jewish refugees who came here to escape the Nazis. People whose life has been brutally taken away are likely to work hard to regain what they have lost.