Who will pay for the cost of living crisis?

The cost of living is rising fast. You may be expecting the chancellor to use his spring Budget to help ease it. But you’re likely to be disappointed, says John Stepek. Here’s why.

In his relatively short time as chancellor so far, Rishi Sunak has had the easiest job in politics.

I realise that may sound a little harsh, given that he came to power just ahead of a global pandemic, but Covid-19 gave Sunak free rein to splash the cash. And you’re never going to be unpopular when you’re handing out money.

Today we’re facing another emergency of sorts – a cost of living crisis. Trouble is, it’s happening just as Sunak was hoping to start paying the bill for the last emergency. 

It’s going to be interesting to see how he copes with playing the bad guy.

Rishi Sunak will be forced to “do something”

The spring statement is meant to be nothing more than a trading update on the UK’s finances. It’s bad enough having one Budget a year disrupting everyone’s plans and giving the chancellor of the day a chance to showboat, never mind having one every six months.

Rishi Sunak was hoping that he’d be able to run through the numbers, say that things were looking better than expected, and thus lay the groundwork for a few nifty wee tax cuts in the run-up to the next election.

Well, so much for that.

Sunak will still be able to say that the public finances look in better condition than expected – a big rebound in employment and economic activity means that tax receipts are bigger than originally forecast.

Incidentally, inflation is the key here. Inflation means that nominal GDP is bigger. The government gets to tax nominal GDP, whereas the payments on its interest bill are currently nicely lagging inflation.

That makes the public finances look healthier, even if you and I are watching our bills rise as fast (probably faster) than our incomes. This is why governments like financial repression.

Anyway, as I’ve just alluded to, the same inflation that is helping the public finances is not doing much for the public’s finances. Sunak has picked the wrong moment to find a fiver down the back of the sofa, because a whole load of people want him to spend it right now rather than in the way he’d have preferred.

When you’ve set the precedent of intervening in one crisis, it’s hard not to intervene in every crisis. And the cost of living crisis is now being exacerbated by the crisis that is Russia’s war on Ukraine. No politician could resist the clamour to “do something” and Sunak is no exception.

The only question is: what will he do?

There are no easy answers. It’s important to emphasise that this surge in energy costs was already happening. It was driven by a lack of long-term planning combining with the unique conditions of the pandemic. Russia has made things worse, but we need to understand that this is the consequence of a series of bad choices rather than some unforeseeable “black swan” event.

Soaring energy prices are going to inflict a cost on the UK. That’s not in question. We could approve a nuclear reactor in every town tomorrow, and start fracking in the foundations as we do so (and perhaps we should). But that’s not going to bring down energy prices today. 

The only question now is one of distribution. Who shoulders the burden of rising energy costs?

However you look at it, the tax burden is going up

From that point of view, we can expect to see at least some attempts to make things a bit easier, particularly for the least well-off.

On a general basis, there’s talk of a 5p cut in fuel duty. If that sounds something of a token cut, then you’d be right. As Sarah Coles at Hargreaves Lansdown points out, that “would still leave the government making 80p a litre at the pumps”.

We might also get a rise in the National Insurance threshold to align it more closely with the income tax threshold (you start paying National Insurance before you start paying income tax).

One thing he probably won’t do, is to scrap the increase in National Insurance that kicks in from next month. That one was meant to “help our NHS” in the long run, and so cancelling it simply isn’t politically viable.

Might there be talk of windfall taxes? I mean, it wouldn’t surprise me but it so far seems to be an outside chance rather than one that will definitely happen.

We’ll have to wait until Wednesday to get the specifics. However, for an investor, none of this is especially important.

Here’s what is important: the tax burden is shooting higher. If you’re someone who has enough money or earns enough money to be thinking about your investments, then odds are, a big chunk of that burden is going to land on you.

Your personal feelings about that will vary depending on your politics, the realities of your financial situation, and all the rest of it. But it’s worth recognising – this is an environment in which it will be much harder to make money, and to hang onto it, than you’ve been used to.

That’s why it’s more important than ever to make sure you’re on top of your personal finances. Make sure that you use your tax allowances each year. You can invest up to £20,000 a year, per person, in an Individual Savings Account (Isa) – for ideas on what to buy, check out MoneyWeek’s latest issue, our Isa special.

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