Poor old Rishi Sunak. Covid hit within weeks of him becoming chancellor. He thought he would now be in a position to start implementing the sorts of long-term policies aimed at stimulating growth and enterprise that he set out in his recent Mais lecture. Instead, he has to deal with a whole new crisis.
Inflation is heading to 8% and, according to the Bank of England, possibly considerably well beyond that. Combine that with earnings rising less quickly than prices, a big tax hike coming in next month, and benefits going up by only 3.1%, and you have the ingredients for the biggest year-on-year fall in household incomes in a generation. Even after the £9bn package that Sunak announced in February, people on average incomes could well be more than £800 worse-off next year than this.
There are suggestions circulating that Sunak has more money to play with than expected. Tax revenues have come in more strongly than forecast. This year’s deficit could well end up £25bn lower than forecast at the time of the October budget. With prices, and nominal earnings, rising faster than forecast, cash revenues will also be higher next year.
Nevertheless, the idea that the Treasury coffers are awash with cash is largely illusory.
First, debt interest payments will be a lot higher than forecast. Second, cash spending on benefits will be much higher than expected, at least from 2023, as inflation eventually feeds through into benefit levels. Third, real-terms growth will be less than forecast. We are worse off than we expected; that means there is less money to go around. And fourth, because inflation is so much higher, the real value of the cash spending plans for public services set out in October will be worth much less than intended. If Sunak wishes to achieve what he set out back then, he’ll have to find more money. More likely he, and we, will have to live with less well-resourced public services – and less well-paid public servants – than projected.
Even so, it is clear that he will find some money on Wednesday to ameliorate the hit to household budgets. Most urgently, he needs to be considering bigger-than-planned increases to welfare benefits such as universal credit. He might extend his February package, which gave the 80% of households in council tax band D and below a £150 rebate, alongside a £200 reduction in energy bills for all, repayable over five years.
Because they benefit almost everyone, those are expensive policies. And we have surely reached the limit on repayable reductions in energy bills, not least because the situation in Ukraine makes it more likely that the cost of energy will remain higher for longer. If he is to do anything on energy bills, it will surely come as a grant not a loan.
He seems to have ruled out delaying the rise in national insurance contributions. That would, in any case, help higher earners more. Getting rid of the 5% VAT on domestic energy would be poorly targeted and, in any case, a pinprick on skyrocketing energy bills. He could extend the £8bn giveaway, which more than a decade of freezes to duty on petrol and diesel has added up to, by cutting those duties. He’ll be reluctant because we all know it will be easier to cut them than to raise them again.
Whatever he does, we can be sure that it won’t be enough to insulate all of us from all of the pressures on our budgets. And I think he is likely to be gloomily honest. World events have made us poorer. No chancellor can wave a magic wand and protect us from that reality for ever.
Paul Johnson is the director of the Institute for Fiscal Studies