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The Spring Statement: some help in response to the “cost of living crisis” as the OBR downgrades growth and revises inflation higher

Date: 4th April 2022

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the forthcoming Spring Statement:
  • The OBR significantly revised their forecasts for 2022. GDP growth was revised down to 3.8% for 2022 (compared with 6.0% in October 2021), followed by 1.8% growth in 2023. CPI inflation was forecast to average 7.4% in 2022 (compared with 4.0% in October 2021) but falling to target in 2024/2025. The OBR assumed that the energy price cap would rise by around 40% in October 2022, after the 54% increase in April 2022. The unemployment forecasts were revised down.
  • The OBR expected that the PSNB outturn will be £127.8bn in FY2021, some £55.2bn down on the £183.0bn forecast made in October 2021. The PSNB is now expected to be higher for FY2022 than in October, as the forecast for debt interest payments rises to £83.0bn. Thereafter borrowing is projected to be lower than in October 2021.
  • The Government’s current fiscal mandate is “…to have public sector net debt (excluding the Bank of England) as a share of GDP falling by the third year of the rolling forecast period (FY2024)”. The OBR assessed that the rule was met by a margin of 1.0% of GDP (£27.8bn).
  • The Chancellor’s measures were modest. They included an increase in the National Insurance threshold in July 2022 (but the proposed 1.25% increase in April 2022 in the NICs rate was unchanged), the basic income tax rate will be cut in April 2024 from 20% to 19% (but the proposed freezing of tax allowances and thresholds, at April 2021 levels until April 2026, was unchanged), and fuel duty on petrol and diesel was cut by 5p a litre (on 23 March). In addition, the Chancellor’s energy bills package (announced in February) was estimated to cost £9bn in FY2022, of which nearly £5bn will be drawn back from FY2023 to FY2026.
Other UK economic news included:
  • Public sector net borrowing (PSNB) was £13.1bn in February, the second-highest February on record, compared with £15.5bn in February 2021. Debt interest payments were £8.2bn.
  • Consumer Prices Index (CPI) YOY rate rose to 6.2% in February, up from January’s 5.5%, effectively the highest since March 1992.
  • Retail sales volumes slipped 0.3% (MOM) in February, after January’s strong 1.9% rise (MOM), but were 3.7% higher than in pre-pandemic February 2020.
  • The Bank of England announced that approvals for house purchases fell slightly to 71,000 in February, from 73,800 in January, but they remained above the 12-month pre-pandemic average up to February 2020 (66,700). Individuals borrowed £4.7bn of mortgage debt (net) in February, after January’s £5.9bn, but it also remained above the pre-pandemic average (£4.3bn).
  • The ONS reported that UK average house prices rose by 9.6% (YOY) in January, only slightly down on December’s 10.0%. London continued to be the region with the lowest annual growth (just 2.2%).
  • GDP rose 1.3% (QOQ, revised from 1.0%) in 2021Q4, to just 0.1% below the level in pre-coronavirus 2019Q4.
  • The households’ saving ratio fell to 6.8% in 2021Q4, compared with 7.5% in 2021Q3, reflecting a 1.3% (QOQ) rise in households’ gross disposable income, which was more than offset by a 1.9% (QOQ) rise in households’ final consumption expenditure. Real household disposable income fell by 0.1% (QOQ).
  • The current account of the balance of payments (including precious metals) deficit narrowed to £7.3bn (1.2% of GDP) in 2021Q4, compared with £28.9bn in 2021Q3, as the goods, services and primary income balances all improved. The goods improvement reflected a large positive movement in trade in precious metals.
Ruth Lea said “…the Chancellor announced some relatively modest support for those experiencing the “cost of living crisis” in his Spring Statement. But, given the reasonable state of the public finances, it is quite possible that there will be further support in the pipeline, possibly before the Autumn Budget, depending on how the Russo-Ukrainian War develops, along with future developments in oil and gas prices. Unsurprisingly, the OBR warned that their forecasts were subject to great uncertainty and, under these circumstances, the Chancellor may well be ‘keeping his powder dry’”.

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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