Government and campaigns
On Wednesday, the Chancellor delivered his Spring Statement, after the Office for National Statistics (ONS) announced the highest rate of inflation for 30 years at 6.8%, up 1.3% since January. The Statement was arguably more policy heavy than many expected, particularly as it’s not a full Budget, but overall, the Chancellor tried to avoid the label of a high tax Chancellor by cutting income tax. There was less for business, and those on Universal Credit and middle-income earners.
You can read our reaction to the Statement here.
The Chancellor started his Statement by reflecting on the international situation and the economic impact of the war in Ukraine. Perhaps inevitably, he blamed the ongoing conflict for the squeeze about to hit UK households – the reality of course, is that that pain was already coming. Sunak said the actions of the UK government including humanitarian aid and economic sanctions were not “cost free” and although it was too early to understand the full scale of the impact, the Office for Budget Responsibility (OBR) growth forecast is lower at just 3.8%.
Alongside the Spring Statement, the Chancellor published a tax plan, which sets out his "principled approach to cutting taxes" by helping families with the cost of living, creating the conditions for growth and ensuring money is fairly shared.
The UK lags behind international peers in adult technical skills with just 18% of 25–64-year olds’ holding a vocational qualification. We’re experiencing an incredibly tight labour market, exacerbated by labour and skills shortages so tackling economic inactivity and ensuring we can upskill and reskill our domestic workforce is critical particularly when you consider that UK employers spend just half the European average on training their employees. To achieve the skills revolution we need, we must ensure our current training offers are fit for purpose - we're pleased government is considering whether the operation of the Apprenticeship Levy is doing enough to incentivise businesses to invest in the right kinds of training, but we've been here before - the proof will be in the pudding!
The impact of levy reform in the current labour market could be higher than ever before - helping to fill vacancies quickly by equipping people with the right skills. A more accessible route to using levy money would be a valuable tool in the government’s levelling up agenda and improve social mobility. In the five years between 2015 and 2020, the number of new apprentices fell by a whopping 237,470. Reforming the levy is something the REC has campaigned on for years, and we’ll continue to work with Ministers and officials to ensure it works effectively for everyone in the labour market.
As largely expected, the National Insurance Contribution increase is going ahead as planned, however, the threshold is rising to £12,570. Although this will help to soften the blow for employees, 60% of National Insurance is paid by businesses – this tax rise will place an extra heavy burden on them, especially as many, particularly in labour intensive sectors are already struggling to recover post-pandemic.
A couple of other welcome measures – from April, Employment Allowance will increase to £5,000 making it cheaper for eligible small businesses to employ workers. Also coming into effect in April, the business rates discount for retail, hospitality, and leisure businesses, giving them a 50% discount on their business rates bill, up to £110,000.
Rishi’s ‘cat in the hat’ was a commitment to cut the basic rate of Income Tax from 20p to 19p in the pound – the catch, it’s not expected until 2024. With inflation expected to average 7.4% this year - almost double what was previously expected - two years is a long time to wait for a tax break!
The Chancellor announced three immediate measures to ease the cost-of-living crisis, including a widely reported 5p per litre fuel duty cut – the cut comes into effect at 6pm on Wednesday. A more net-zero focused announcement on removing the 5% VAT on energy efficiency measures for households in GB* is a positive step to incentivise investment in green technologies, something the REC called for in our Spring Statement submission. The Household Support Fund is also being doubled to £1bn, £500m of which is new funding. The support fund was set up to help low and middle-income households during the pandemic – however, it’s a discretionary fund which is distributed by local councils, so for anyone hoping for more targeted help, this will be a bit of a damp squib.
*Worth noting this VAT cut doesn’t extend to homeowners in Northern Ireland because VAT is covered by the Northern Ireland Protocol so the Treasury will need to get agreement from the European Commission to extend that. In the meantime, the NI Assembly will receive additional funding equivalent to the value of the VAT cut.
The Chancellor rightly highlighted that the UK doesn’t invest enough – either in technology or ideas, a “longstanding cause of our productivity gap internationally.” To address that, he announced changes to R&D tax credits so they’re “effective and better value for money” – he also committed to reviewing whether R&D expenditure credit should be more generous.
He committed to cutting the tax rates on business investment in the Autumn Budget.
All in all, it was a rather odd Spring Statement. Increasing the NI threshold is a welcome step, but save for a small cut in fuel duty, there’s not too much to give struggling households and businesses the support they currently need what with high inflation and energy costs to contend with.
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