Last week, Chancellor Rishi Sunak was faced with a difficult fiscal situation. The combination of national debt, inflation, and a cost-of-living crisis meant that people in the UK are feeling the squeeze, with many people struggling to make ends meet. His mini-budget had the potential to deliver some much-needed help and kick-start the road to recovery. In the event, what he delivered was insufficient, out-of-touch, and wholly underwhelming.
The covid pandemic has given rise to huge but necessary increases in public spending and the national debt to GDP (gross domestic product) ratio is at its highest for over 40 years. Inflation (that had been dormant for a number of years) is rising and is expected to peak at 8 percent this year, partly due to the financial fall-out from the Ukraine/Russia war. And people are experiencing a cost-of-living squeeze with rising fuel prices both at the pumps and in our homes.
Where price rises run ahead of increases in income then people suffer ‘a loss of real income’. Those on fixed incomes are the hardest hit.
Distribution of income and wealth in the UK
If the distribution of income and wealth in the UK is compared with that of other developed nations, it is the case that inequality is higher in the UK than in many northern European countries. The Office for National Statistics reports that:
“Growth in UK income of the poorest fifth of people did not keep pace with inflation, which led to the median income of the poorest fifth falling by an average of 3.8% per year between 2017 and 2020 … Median income of the richest fifth continued to grow steadily between 2017 and 2020, meaning that some measures of income inequality have increased over this period.”
Wealth in the UK is even more unequally distributed than income and the first 18 months of the pandemic saw wealth at the top end increasing sharply (the number of billionaires in the UK rose from 147 to 171).
Even before the war started in Ukraine, the chancellor planned to raise the UK cap on domestic fuel prices, so heating costs were bound to go up sharply. And these rises have been matched by those at the petrol pumps.
Russia is a major supplier of oil and gas globally. The turbulence in the fuel market occasioned by the war and the uncertainty generated has ended up with the prices charged for raw materials being much higher. Not only have prices at filling stations rocketed, but oil and gas companies have enjoyed significant increases in profits – a windfall gain. It is reported that investors in oil company shares have enjoyed dividend payouts of £6bn.
In addition, the UK fuel levy was instituted some years ago with a view to ‘greening up’ the economy by discouraging private motoring and encouraging use of public transport. The idea was that the levy would be increased annually and people would respond by altering their transport mode. Sadly, the government bottled out of instituting the planned increases, so the levy simply plateaued.
Finally, in April, national insurance contributions are set to rise by 1.25 percentage points. This was the government’s solution to the lack of funding both for the NHS and for social care. Additional revenue raised is due to be directed first to the NHS and subsequently to funding social care.
What Sunak did
The three key elements of Sunak’s spring statement were:
- A 5p cut in fuel duty to relieve inflation at the petrol pumps.
- A raising of the national insurance threshold by £3,000 – hence taking some of the low paid out of paying national insurance contributions.
- Promise of a cut of 1p in the basic rate of income tax in 2023.
The budget was profoundly disappointing. It was unimaginative, regressive and merely designed to help the Conservatives play to their supporters: the older generation and the wealthy. Priority was given to winning the next general election, while in the meantime those on benefits, the young and the environment will take the hit:
- The cut in fuel duty (levy) is clear backsliding on a policy designed to help the environment. In typical Tory fashion, the future is being traded off against the present.
- The 1.25 percent hike in national insurance contributions was a bad solution to funding social care, but raising the threshold at which payment starts will leave both the NHS and social care shorter of funds than they otherwise would have been.
- The flagged up cut in basic rate of income tax is relatively trivial but designed to win a headline. Conservative perception management at its worst.
In addition, there are two significantly adverse ‘redistributional effects’ at work here.
Redistribution of wealth to the wealthy
The first is generational, as pointed out by the Intergenerational Foundation think tank. Young people in their 20s and 30s are already in more precarious employment than older workers, and quite a few have the hangover of student debt. According to Liz Emerson of the Foundation, Sunak is choosing “to extract more tax from the younger, rather than older generation by targeting earned rather than unearned income”.
The second shift, that verges on the immoral, is the way in which those on higher incomes benefit more from the budget than those on lower. The Resolution Foundation has number-crunched the spring statement and finds that of every £3 by which the population benefits from the chancellor’s changes, £1 goes to the lower half of the income distribution and £2 goes to the upper.
It has been a key criticism coming from all quarters since Wednesday that nothing has been done for those on benefits (that have not been uprated). It is this group that suffers the toughest drop in real income. Sunak’s misanthropy has fallen on the shoulders of those least able to bear it.
What might a better chancellor have done?
A better chancellor could have considered a number of alternative options, all of which would be considered progressive (therefore less appealing to many Conservative voters):
- A 20 percent tax on the increase in the last two years of the wealth of those ‘worth’ £5m or more. During the pandemic, the Treasury via the Bank of England engaged in quantitative easing that resulted in a sharp increase in asset values (e.g. houses). This windfall gain could easily be taxed – and a 20 percent tax as suggested would wipe off a significant chunk of the national debt, allowing the government greater freedom for fiscal policy in the future.
- Tax the next windfall gain of the sharp increase in profits of the oil and energy companies. The latter are screaming that they need to retain these profits in order to invest in renewables. However, the fact that an extra £6bn has been passed over to their shareholders in increased dividends gives the lie to that assertion.
- Increase social security such as universal credit in line with inflation, thus protecting the real purchasing power of benefit recipients.
- Remove loopholes in inheritance tax laws to increase the inflow of revenue and reduce inequality of wealth holding. (At present the wealthiest 1 percent in the UK own 23 percent of total wealth and the wealthiest 10 percent own more than half).
- Triple the funding allocated to HMRC and other official anti-fraud agencies. Past performance shows that every £1 invested in fighting fraud and underpayment results in more than £2 flowing back to government.
- Most radically, introduce land value taxation. Intellectually, land value taxation has an impeccable pedigree, being supported by no fewer than four Nobel Laureates in economics. It is the least distortionary of taxes and has the capacity to raise comfortably more than a third of Treasury required revenue.
Conservative fiscal policy
The chancellor appears to have designed his budget with a focus on winning the next general election. Perhaps his priority is to build a war chest to finance a later giveaway budget in the hope of bribing voters to award his party yet another term of office.
The likes of William Gladstone, David Lloyd George and Clement Attlee sought office for a purpose – with ambitions to effect great changes. Many in the present government aspire to no more than winning office in order remain in office; hence the palpable thinness of Sunak’s spring statement. It was as if, finding a dwelling house badly ablaze, the chancellor thought it sufficient to approach with a bucket of water and a stirrup pump.