In early March, Rishi Sunak announced his 2022 Spring Budget designed to help ease the cost of living within the UK and help kerb to ever rising rate of inflation within the British economy. Now after several weeks we have been able to digest and comprehend what his budget actually means for the majority of the UK.
As 2022 rounds out its first quarter, it has become very clear from all media sources that inflation is continuing to rise. This began as we re-emerged from the COVID-19 pandemic. During the national lockdowns, factories across the world were shut but demand grew. People also saved their cash rather than spent it due to the ongoing uncertainties across 2020 and in to 2021. Not only were factories shut but the offices used to process orders and run the administrative side of businesses were furloughed.
Lot of businesses, in every sector, couldn’t provide the products desired by their customers. The situation was further exacerbated when a reported 1.2 million people left the employment market. Most of these people retired, having seen the writing on the wall and predicated that post-pandemic they wouldn’t be needed.
Now we are in a scenario were there aren’t enough workers to provide the services we need. Brexit added another complication as the UK couldn’t just import a mass of cheap labour from the European Union.
Quantitative Easing by the Bank of England
In November 2020 the Bank of England began another phase of quantitative easing (the artificial printing of money) – this time to the tune of £150bn ($198bn at the time). This was done in order to (successfully) stave off a depression, helping prevent a ‘double-dip recession’.
It now seems to be having the opposite effect, with inflation currently sat at just over 6%. The Bank of England predicts inflation to hit 8% by the end of spring and could swell even higher later in the year. This is very significant, as that means inflation will be at its highest since the 1980’s. To add insult to injury, the UK is moving into a period where living standards are going to reduce by the same levels it saw in the 1950’s.
Geo-political problems in Europe
The continued issues with the Russian invasion of the Ukraine and the sky rocketing cost of energy bills have left the UK economy, as well as millions of families, on a precipice.
In these troublesome times Chancellor of the Exchequer, Rishi Sunak, has repeatedly told the UK that he’s a prudent chancellor. He keeps informing the general public that he is a generous chancellor, one that likes to provide for us.
The 2022 Spring Budget
In late March, the Spring budget was announced and in short, it doesn’t add up to much. The figures presented in front of Parliament may sound impressive at first glance, but further investigations shows that they are in fact a drop in the ocean of what they needed to be.
Rising fuel costs
The UK is currently witnessing petrol prices in the £1.60’s a litre whilst diesel is rubbing £1.90 a litre. Part of this increase comes via Russia’s invasion of Ukraine. According to Downing Street, the UK gets about 8% of its overall oil supplies from Russia, which equals around 18% of our diesel. This isn’t as bad as the EU, who rely on Russia for nearly a third of their oil.
Diesel itself is extremely important to the UK economy. Not only does it power around 30% of all UK cars, it also powers trucks, buses and some trains. Diesel is also used in farming and agricultural equipment (as the famous red diesel).
In order the combat the seemingly continuous climb of fuel prices, Sunak announced a 5p per litre reduction in fuel duty. In the UK fuel duty makes up 35p in every £1 you spend on fuel. As of 6pm on 23rd March 2022, this dropped to 30p in every £1 spent. This reduction will last one year until the following March.
So how much does this benefit the UK motorist? On an average £90 fill up, the chancellors fuel duty cut will save you around £3. As of late March / early April the pumps have only seen an average reduction of 2.7p per litre. We’ll give the forecourts the benefit of the doubt until later in the year to see if they pass on this cut to the consumer or use it for profiteering.
Sunak’s big thank you to the UK motorist seems more like a hollow gesture to tick a box, rather than provide some meaningful relief.
Skyrocketing energy fuel prices
Next up we have the increasing cost of energy. Something that has seen prices go supernova in recent months. The situation became so dire that in 2021 some 4.3million customers lost their supplier to cost issues. The bulk of this problem is sourced from wholesale gas prices. As of April 1st 2022, 22 million households suffered another crippling blow to their finances.
OFGEM, the UK government regulator for gas and electric, increased the energy price cap by a staggering 54%. This increase only affects people on standard rate tariffs. The new price cap, which will last until 30th September 2022, sees both energy costs and standing charges increase.
- Electric will increase from £0.21 per kWh to £0.28 per kWh. The standing charge for electric will also increase by a staggering £0.20 to £0.45 per day.
- Gas prices will increase from £0.04 per kWh to £0.07 per kWh. The gas standing charge will increase by 1p to £0.27 per day
On average this will increase yearly payment by £693 for account paid via direct debit. Pre-paid accounts will see an average increase of £708.
The scary part of the OFGEM increase, is that it only lasts until the Autumn when prices are expected to expand yet again. This time by another 30%. What did the 2022 Spring budget do for the energy crisis?
Sadly, the answer is again not much. According to recent research, 40% of homes with children are now in fuel poverty. 40%.
25% of all homes are now classed as being in fuel poverty, that’s 1 in every 4 homes.
What is fuel poverty?
Fuel poverty, in essence, is when a household spends more than 10% of their income on fuel. According to British gas, the average 2 adult 2 children home uses about £1970 worth of gas and electric every year. This means you would need a take home salary of £19,700 just to not be classed as being for fuel poverty.
Tackling the rising costs of energy in the 2022 Spring Budget
Council tax rebates and interest free loans
Households in council tax bands A-D will be given a £150 rebate on their council tax. This payment should begin in April for houses who pay via direct debit. For later in the year the chancellor announced a £200 interest free loan for households to use for rising energy costs.
This loan will be interest free and paid back over 5 years starting in 2023. With average energy prices rising by nearly £700, Sunak has offered the UK taxpayer help of around 50%. When you factor in the skyrocketing inflation and fuel prices, his measures do very little to help. Also, the loan means as prices continue to increase, families will also have to make repayments to the government.
Scrapping VAT on energy saving products
Another of Sunak’s plans is the removal of the 5% VAT on energy efficiency materials such as solar panels, heat pumps and insulation.
This is yet another hollow move by the chancellor. The average cost of a simple 4kW solar panel set up is knocking on the door of £5000. The removal of the VAT brings this cost down to around £4750. At a time when families are struggling to heat their homes or feed their children, a 5% discount on £5000 seems out of touch.
Sunak championed this plan by announcing it was only doable because of Brexit. This isn’t true, as in early March 2022 the EU approved plans for all its member states to exempt products, such as energy savings materials, from VAT.
Sunak’s power punching policies for National Insurance and Income tax
Now we move on to the main power punches of Sunak 2022 Spring budget. The chancellor announced an increase in the threshold at which people will start paying National Insurance. The income tax threshold is £12,570, but National Insurance was sat at £9600.
In an unexpected move, Sunak raised the National Insurance threshold to match income tax. This blindsided most people, even other MPs, as they expected just a £1000 increase, at best. The new threshold means an average tax cut of around £330. This tax cut won’t start until July 2022. The threshold increase will slightly compensate for the increasing rise in inflation but again, doesn’t go far enough to benefit people.
The “best” was yet to come. Sunak proudly announced that he will be reducing income tax from 20% down to 19%. The downside (as always) was that this pledge was made with no defined date. Sunak only said he would do so before the Conservative government was up for re-election. Most noted this was simply a move kept in the chancellor’s pocket to win voters at the next general election.
What about the UK property market?
Where does the 2022 Spring Budget leave the UK property market?
First time buyers are wondering, and worrying, how they can afford to save for a deposit. Their spending power has been hacked down by the cost of living crisis. According to the Office for Budget Responsibility (OBR), the proportion of income that’ll be saved is going to fall, drastically. Throughout the pandemic, families were typically able to save 10% or more of their salary.
Throughout 2022 and in to 2023 this is expected to plummet to just 3.1%. The only silver lining is that, according to the OBR, runaway house prices are beginning to slow. Forecasts predict UK house prices will increase by 7.4% in 2022 but just 1.3% in 2023. Then across 2024, 2025 and 2026 houses will increase by 1.5%, 2.5% and 3.1% respectively.
In conclusion, how effective will the 2022 UK Spring Budget be?
Not very. Sunak has played his card of telling everyone how much he cares without any substantial back up. His tax cuts and rebates offer the average home round £700. The Spring energy fuel rises wipes this out almost instantly. Moving towards the Autumn families are expected to struggle in way we haven’t seen as a country in nearly 70 years.
More than 1 in 5 people are currently in poverty, a number that will only grow with these cost increases. Its time to batten down the hatches and prepare for some rough seas ahead.
Have a question or wish to find out more? Then simply get in touch with us today and a member of the team will be on hand to help.