For the third year in the row, the Chancellor of the Exchequer will be presenting the upcoming Spring Statement in extraordinary times. As we learn to ‘live with Covid’, Vladimir Putin’s invasion of Ukraine has sparked new concerns for the UK’s spending priorities. Below are three key areas forming the backdrop to Wednesday’s announcement:

1. Rising inflation

With reports of double-digit inflation, cost-of-living has become the dominant issue on the political agenda in the UK. The effect of inflation becomes clearer when looking at the soaring energy bills and with already-high food prices set to skyrocket due to supply chain disturbance caused by the Russian invasion. As a result, many Conservative backbenchers and Opposition MPs have been pushing the Government for concrete solutions and have put forward proposals to slow the speed on inflation, including a freeze on fuel duty and a cut to VAT on energy bills to tackle rising household bills. In addition, key Cabinet members, including the PM, have brought forward proposals such as further assistance for low-income families and delaying repayments of the council tax rebate.

However, it is important to point out that the upcoming statement, is not usually a forum for big fiscal announcements but rather meant to be an indication on the way forward before the Autumn Budget. Despite the cost-of-living crisis, the Treasury may – at this stage – only be willing to provide a temporary strategy for tacking inflation going forward with major announcements reserved for October.

At the same time, the Chancellor recognises that whilst the Spring announcement is usually a platform for smaller announcements, the spiralling inflation has caused an unusual period for millions of families struggling with the rising costs. This may force the Government to take immediate action in the form of a “mini-Budget”, albeit in limited areas. Based on the recent rhetoric from the Chancellor, one of those areas could be the reduction of fuel duty and more tailored support packages for families, including financial aid for childcare costs or through an increase in Universal Credit payments.

2. National Insurance, Income Tax and VAT

In regard to the planned hike in national insurance (NI) contributions, a similar approach may be seen. Many business leaders and social campaign groups have warned HM Treasury of the impact of the NI 1.25% increase on the already-stretched finances of families across Britain. Despite the resistance, at this stage, there seem to be more signs pointing to the NI increase going ahead. However, exempting low paid workers from the increase may be a more likely scenario. As a compromise for those calling for a delay in the increase, it seems that the Chancellor may be more open to the idea of raising the thresholds at which employees are asked to pay the 1.25% NI increase – aiming to take around 150,000 people out of paying the levy.

It is unlikely that the Chancellor will be making any announcements of income tax changes this week. However, the Government will be forced to decide in the months ahead how it looks to tackle the cost-of-living crisis. If we will continue to see soaring prices, the pressure to provide additional financial aid may be too strong to oppose. Consequently, HM Treasury may at the same time be pushed to increase income tax in an effort to fix the historically strained public finances. Nonetheless, these scenarios are likely to unfold in the autumn.

Whilst most big announcements will most likely be held off until October, a decision on whether the VAT and business rate relief scheme will be extended beyond March 31 is certainly more likely to be expected on Wednesday. Leaders from hospitality businesses are urging the Government to keep the 12.5% rate, arguing that those who are already struggling due to inflation may stay away from restaurants and bars if higher prices are further exacerbated.

A “major overhaul” of the corporate tax system is also expected to be started on Wednesday, with the Chancellor aiming to spur more capital spending by companies. R&D tax credits are set to be one area of focus for reform, with the Treasury unconvinced about their value for money at present. Sunak has signalled he wants to be more strategic and targeted when it comes to tax of capital investment, and it is expected a more generous offer will be made to businesses in this area. Other areas to look out for will be the Apprenticeship Levy and super deduction tax break which have also formed part of conversations in No.11 Downing Street.

3. War in Ukraine

Last but certainly not least is the crisis in Ukraine and how that may impact the UK’s defence spending. Here, inflation is once again at the forefront of discussion. It was recently revealed that due to the rising prices, the UK’s defence spending will fall in real terms before the next general election. This is concerning for two reasons. Firstly, whilst the increased British presence in NATO’s eastern flank and military aid for Ukraine has certainly strengthened the UK’s position in the region, evaporating defence spending may overturn Global Britain’s successes in Europe. Secondly, from the party-political perspective, the Conservative’s promise to keep defence spending above inflation ‘every year’ – is yet another manifesto promise that is set to be broken. The more defence-minded backbenchers and Foreign Secretary have already pushed this agenda.

However – as has been a common theme throughout this blog – both the Chancellor and the PM have publicly ruled out any further increases in defence spending at this stage. Here, the Government counters the calls for increased spending by referencing last year’s biggest defence spending since the Cold War era.

The Chancellor will deliver the Spring Statement in the afternoon of Wednesday 23^rd March, it will be accompanied by a Written Statement and Office for Budget Responsibility forecasts. PLMR will be covering all developments – look out on our website and contact Daniel.baynes@plmr.co.uk if you would like to receive our briefing directly.