This week's Spring Statement is only meant to be an economic update, not a full-blown Budget.
However, with a cost-of-living crisis hitting the headlines and people across the country struggling to pay soaring bills for energy, food or petrol, it seems impossible that Chancellor Rishi Sunak will ignore all that and not offer any help to the UK public.
The Government has already announced some handouts, but that was before the Ukraine crisis pushed energy costs even higher and left households looking down the barrel of another estimated £1,000 on their annual energy bills later this year, on top of the existing £700 hike coming next month.
At a time when some households are having to make tricky decisions between paying for heating or food, it looks particularly poorly timed for the Government to be launching a new tax hike, in the form of a rise to National Insurance, or freezing income tax rates and so taking more out of people’s pay packets by stealth.
At the same time, hospitality businesses will see an increase to their VAT back to 20% after the emergency lower rate during the pandemic and many businesses will face rising staff costs thanks to a minimum wage increase.
So what can the Chancellor do to help? Laura Suter, head of personal finance at AJ Bell, looks at the options.
1) Help with energy bills
“When the energy price cap changes in October average household energy bills are now predicted to rise to £3,000. The current Russia/Ukraine crisis has pushed energy costs higher and they could go above that. The current help from the Government to soften the blow of rising energy bills only covers about half of the existing increase that we’re due to see in April. At that point the average household energy bill will rise by £700. But if we do see energy bill costs rise another £1,000 on that, you’ve got £1,700 of increases in 2022 and just £350 of support.
“One option that might appeal to the Government is to extend the £200 energy bill loan scheme. This is a no-cost move over the longer term, as everyone will pay back the money over the next five years. The Government could also decide to defer when the repayments begin, as they are due to start from April at a rate of £40 a year. Now it looks like higher energy costs are here for longer, it doesn’t look very wise to have the repayments starting so soon, when people will still be battling higher bills."
2) Delay the NI hike and dividend tax increase
“The planned 1.25 percentage point increase in the National Insurance rate and dividend tax rate could be halted for a year. The move is intended to raise money for health and social care. Because there wasn’t time to set up an entirely new Health and Social Care Levy before the tax rise came in, it’s being temporarily added to National Insurance rates for this year only, meaning there is room for the Government to U-turn on the move and implement it fully as a new levy from 2023.
“MPs have passed a motion in the Commons to cancel the raise, but so far it’s being ignored by Prime Minister Boris Johnson. The Government broke a manifesto pledge when it announced the move, leading to negative headlines across the board, which makes it potentially harder for them to now U-turn.”
3) Triple lock inflation linking
“Pensioners relying on the state pension are going to be hit hard in the current cost of living crisis as they are getting a below-inflation increase in their pension payments of 3.1%, but are a group that spend more of their money on things like energy bills and food, which are seeing large price raises.
“The Government ditched the triple lock this year as the wage inflation figure was so high, but it could revise the inflation figure it uses for the state pension uplift, to better reflect the current inflationary environment. Interestingly, the latest inflation figures are released on the same morning as the Spring Statement, raising questions about whether an alternative measure of inflation will be generated to base any state pension increase on.
“Currently the 3.1% increase in the new state pension will take weekly payments to £185.17, while the basic state pension will rise to £141.87. If they instead rose by 7% pensioners on the new state pension would see an extra £364 a year, while those on the basic state pension would get £279 a year more.”
4) Lifetime ISA exit penalty
“The Government reduced the Lifetime ISA exit fee to 20% during the Covid pandemic, to reflect the fact that lots of people would have to withdraw their money due to losing their job or seeing their income fall. This sets a precedent and shows that it’s easy for the Government to implement a reduction.
“With the cost of living soaring and wages failing to keep up, it’s inevitable that some people will reluctantly have to dip into their Lifetime ISA savings just to pay their bills and meet the rising cost of food, petrol and energy bills. The Government could reduce the exit fee to 20%, so it just reclaims the Government bonus. It will give people a bit of breathing room to dip into their savings and not face the punitive exit fee for doing so.”
5) MPAA limit
“The Government could take the same approach with the Money Purchase Annual Allowance (MPAA). At the moment, anyone who accesses taxable income from their pension is hit with the MPAA, lowering their annual allowance from £40,000 to just £4,000. In tough times it is likely more people will turn to their retirement pot to cover a shortfall and in these circumstances it feels unfair to handicap their ability to rebuild their retirement savings once the cost of living crisis has lifted. Scrapping the MPAA would make it easier for millions of people to use their savings to keep afloat during the crisis.”
6) More green Gilts
“The Government has already raised £16bn through its Green Gilt issuance, and considering the latest one was 12 times oversubscribed, there’s clearly still appetite to buy more of these green Government bonds. The money raised is used for projects like zero-emissions buses, offshore wind and schemes to decarbonise homes and buildings. The recent energy crisis has focused attention on the need for renewable infrastructure investment, so it makes sense that the Government would raise more cash for this cause.”
7) VAT changes
“The VAT rate for hospitality businesses was slashed to 5% during Covid, it has since risen to 12.5% and will rise again to 20% from April. This last increase could be delayed, to keep those businesses at the 12.5% rate and help them while they struggle with rising bills, meaning either higher prices for customers or lower profits. More broadly, the Lib Dems are also calling for the VAT rate to be cut from 20% to 17.5% for a year, which they say will save families £600 a year on average.”