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The Spring Statement: focus on the Chancellor’s response to the “cost of living crisis”

Date: 21st March 2022

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the forthcoming Spring Statement and other economic developments:
  • The OBR will produce revised forecasts for the Spring Statement, due on 23 March. GDP growth is expected to be revised lower for 2022, reflecting the squeeze on household incomes, whilst CPI inflation is expected to be revised significantly higher.
  • Public sector net borrowing so far in the current financial year (FY2021) has undershot the OBR’s October forecast by over £15bn. This gives the Chancellor some room for, for example, targeted tax cuts to ease the “cost of living crisis”.
  • There is speculation that he may delay, or even cancel, the freezing of tax allowances and thresholds and/or the planned 1.25% increase in NICs. Other possible measures include cutting taxes on fuel and domestic energy bills and/or increasing Universal Credit.
  • The MPC increased the Bank Rate from 0.5% to 0.75% at their March meeting, as expected. Concerning future rises, the MPC’s tone was noticeably more dovish than in February but further rises are still, nevertheless, expected, possibly with an increase to 1.0% in May or June.
  • The MPC warned that CPI inflation may increase to around 8% in 2022Q2, and perhaps even higher later in 2022.
  • The ONS announced that GDP rose by 0.8% (MOM) in January after December’s 0.5% decline. GDP was 0.8% higher than the level in pre-pandemic February 2020.
  • The trade balance deteriorated sharply in January, partly reflecting a recent operational change in collecting the trade data as well as a sharp deterioration in the balance on precious metals.
  • The labour market remains robust. The number of payroll employees increased by 275,000 (MOM) in February to a record 29.7mn, whilst the unemployment rate fell to 3.9% in the three months to January. Vacancies were at a record level in the three months to February.
  • Annual growth in average total pay (including bonuses) was 4.8% and in regular pay (excluding bonuses) was 3.8% among employees for the three months to January. In real terms total pay rose by 0.1% (YOY), but regular pay fell by 1.0% (YOY).
International news:
  • The Fed increased the Fed Funds rate by 0.25% at their March meeting and indicated further rate rises to come. The Fed revised down their GDP growth projection for 2022, whilst raising the inflation forecast.
  • The ECB, somewhat unexpectedly, speeded up the tapering of its asset purchases programme at its March meeting, but remains in no hurry to raise rates. In its revised economic projections, the ECB also downgraded GDP growth for 2022, whilst raising the inflation forecast.
  • The OECD’s March Economic Outlook focussed on the economic and social impacts and policy implications of the War in Ukraine. They concluded the moves in commodity prices and financial markets seen since the outbreak of the war could, if sustained, reduce global GDP growth by over 1% in the first year, with a deep recession in Russia, and push up global consumer price inflation by approximately 2½%.
Ruth Lea said “…the Chancellor’s Spring Statement is due on 23 March, with popular interest focusing on how he responds to the “cost of living crisis” and the squeeze on household incomes, reflecting the sharp increase in energy prices and the forthcoming higher tax burden. So far, there have been few hints as to possible measures, albeit much speculation. However, given the better-than-expected public borrowing data so far in FY2021, he could ease households’ difficulties by, for example, cutting taxes on fuel and domestic energy bills. Or he may delay, or even cancel, the freezing of allowances and thresholds and the planned increase in NICs.”

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Press enquiries:

Arbuthnot Banking Group PLC: 

Ruth Lea, Economic Adviser 
07800 608 674, 020 8346 3482 
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright 
020 7379 4415