As pressure mounts on Chancellor Rishi Sunak to help UK households manage the rising cost of living, experts warn that there are no easy choices to be made.
Government borrowing reached £13.1 billion in February 2022, marking the second highest February borrowing in nearly three decades and £12.8 billion higher than in February 2020.
While rising inflation has helped propel tax receipts higher, with VAT receipts £23.8 billion bigger this year as a result of higher prices, and fuel duty netting the government an extra £4.5 billion so far this year, AJ Bell head of investment analysis Laith Khalaf said the Chancellor remains in a “precarious” position.
Khalaf said: “Inflation giveth and inflation taketh away. So far this fiscal year interest payments on government debt have rocketed from £37.5 billion to £67 billion. That effectively means that around half the money the government is currently borrowing is being used to service its debt which is a precarious position for any Chancellor.
“Higher debt interest payments are also likely to scale back the size of the windfall Rishi Sunak has to play with in the forthcoming Spring statement. The OBR will be pushing up its forecasts for inflation and interest rates, which will also elevate the projected cost of servicing government debt. The Chancellor is clearly under huge pressure to fork out to help out with the cost of living crisis but record levels of borrowing, combined with rising interest rates, will probably temper his generosity.”
Shaun Moore, tax and financial planning expert at Quilter, commented: “Sunak is expected to splash some cash at his Spring Statement in order to deal with the cost of living crisis. Energy bills are set to increase considerably from April and then again in October. On top of this, the increase in national insurance rates will reduce the take home pay of the majority of workers. All the while the inflationary squeeze will knock real earnings and push up the cost of essential goods.”
Following the Russian invasion of Ukraine, which is expected to see domestic energy costs swell, Moore says the Chancellor could use his Spring Statement to expand the previously announced energy support package. However, an expansion would cost an additional £12.5 billion on top of the £9 billion already announced so would be an expensive move by the Government.
Instead, Moore says the Chancellor may uprate benefits by an amount greater than the 3.1% currently pencilled in, costing the exchequer an extra £9 billion, which would be a cheaper and more targeted measure but may omit middle-income households.
Moore said a final option could be to explore VAT on energy supplies, including fuel.
He added: “The IFS estimates that reducing VAT down to zero on domestic fuel would be £2.4 billion, so a significantly cheaper option but it would be very broad brushed and not targeted. The Chancellor has already ruled out a reduction in VAT on energy bills for precisely that reason.
“No choice is easy and no choice is cheap. Whichever option the Chancellor chooses, it will not completely offset the increase in energy costs. Expect political tensions to rise considerably over the following months.”
