Chancellor Rishi Sunak is due to set out the government’s spending plans and economic forecast on Wednesday next week. Here are just some of the things he might change. 

 

The Spring Statement sets out the government’s economic forecasts and its spending plans and will take place on Wednesday next week. Sunak has hardly had a normal period as chancellor; since he assumed office in February 2020, the end of the Brexit transition period and Covid-19 have called for unusual measures. 

 

This year will again see Sunak under pressure as households face crippling energy bills, and there will be calls for a bigger defence budget in light of the Russian invasion of Ukraine.  

 

Cuts to defence spending over the past 70 years have allowed higher spending on the NHS without growing the size of the state, according to Carl Emmerson, deputy director of the Institute for Fiscal Studies, but the Treasury may begin to change its priorities. The NHS meanwhile continues to have to provide for an ageing population, with a budget that is lower in real terms than  

 

Increasing tax had been a no-no for the Tory government until recently, but last year, breaking a manifesto commitment, it said that more tax income was needed, announcing an increase in national insurance contributions of 1.25% for individuals and employers to fund the NHS and social care.  

 

Sunak also froze multiple tax thresholds for several years – so they bite earlier in real terms and impact more people. The government has announced help for dealing with skyrocketing energy bills, but will the Treasury stick with the NICs rise in the face of high inflation and a ‘cost of living crisis’? 

 

Steven Cameron, pensions director at provider Aegon, said the government is facing a barrage of calls to ease the cost of living squeeze, including asking the chancellor to defer April’s 1.25% NICs increase. 

 

“The increase in NI will cost the average worker £250 a year at a time when prices are rising at the fastest rate for three decades, with the squeeze on income expected to worsen in the coming months,” he said. After the House of Lords rejected the draft social care funding bill, finalising the deal may take some time – which could serve as justification for a delay in the NI increase, “perhaps for a year”, Cameron speculated.   

  

“However, despite all the many financial challenges we face as a nation, the government can’t ignore the need to prop up the NHS and implement a new social care deal with an appropriate cap on care costs," he added. 

 

The NICs increase could be halted for a year, agreed Laura Suter, head of personal finance at investment platform AJ Bell; because there was not enough time to bring in the new Health and Social Care Levy, the rise is planned to temporarily be added to national insurance rates for this year only. This means that “there is room for the government to U-turn on the move and implement it fully as a new levy from 2023”, said Suter. 

  

She added that “at a time when some households are having to make tricky decisions between paying for heating or food, it looks particularly poorly timed for the government to be launching a new tax hike, in the form of a rise to national insurance, or freezing income tax rates and so taking more out of people’s pay packets by stealth”. 

 

 

Income tax thresholds and bands, the pensions lifetime allowance and more were frozen in April last year, in what is sometimes dubbed ‘stealth taxes’. 

  

“While in the past such ‘stealth tax’ measures have often gone unnoticed, in the current climate of rampant inflation, they will have a major adverse impact on an increasing number of people,” noted Cameron. 

 

He believes the Treasury “could not have foreseen the events which have led to inflation rising sharply” and might therefore want to revisit these measures.  

 

Similarly, the pensions lifetime allowance is set to be kept at £1,073,100 until 2025-26, gradually impacting more people, particularly those with defined benefit pensions. Many more individuals could therefore face an unexpected tax penalty. “We’d welcome [Sunak] revisiting this decision in light of current rocketing inflation, ideally by unfreezing the limit earlier than planned and returning to inflation-based increases,” said Cameron. 

 

 

The steep rise in inflation has also caused some people to call for more money for state pensioners. The state pension triple lock became a double lock after lockdown because the reopening of the economy led to outsized nominal wage rises which would have distorted the increase.  

 

State pensioners are protected from inflation, but there is a time delay; until the increase is applied, they have to make do. They are set to receive an increase of 3.1% in April, based on September 2021 figures. “This is far below the current rate of inflation,” said Cameron. “We’ll be on the lookout for any temporary targeted support the chancellor may grant,” he said.  

 

Pensioners relying on the state pension spend more of their money on energy bills and food, which are seeing large price rises. The government could revise the inflation figure it uses for the state pension uplift, to better reflect the current inflationary environment, suggested Suter.  

 

“Interestingly, the latest inflation figures are released on the same morning as the Spring Statement, raising questions about whether an alternative measure of inflation will be generated to base any state pension increase on,” she observed. 

 

Where could the screw be tightened? 

  

The Spring Statement could also bring news about how the government plans to raise money. Suter pointed out that the latest green gilts issue was 12 times oversubscribed, showing that there is considerable appetite for this type of security among investors, and so the government could issue further green gilts. 

 

A big change in pensions taxation is however unlikely, she suggested, as this would be a highly unpopular move among ‘middle Britain’, whether it is on tax relief or the 25% tax-free allowance. 

   

“While strained public finances demand the chancellor reviews all areas of public spending, a dramatic pension tax relief raid would come with huge practical challenges and political risks," she noted. 

  

The annual allowance is the simplest lever to pull if the Treasury is looking to raise taxes via pensions, she said, and could be lowered for example to £30,000 or even halved to £20,000, where the ISA limit is set.