Autumn Budget and Spending Review 2021 – Report Summary

This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.

Author: Treasury Committee

Related inquiry: Autumn Budget and Spending Review 2021

Date Published: 27 January 2022

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Summary

Fiscal rules

According to the Office for Budget Responsibility, the Chancellor has between a 55 and 60 per cent chance of meeting his fiscal rules. He has given himself less room to meet his rules than his predecessors. The headroom may prove insufficient should one of the many risks to the economy crystallise.

Inflation

The Office for Budget Responsibility states that its central forecast for the path of inflation could be too low. Since the Budget, inflation has already significantly exceeded the level forecast by the OBR in October. The Bank of England raised interest rates to bring the rate of inflation back towards its two per cent target, and is likely to increase them further. It is therefore likely that by the next economic forecast, the Chancellor may be faced with significantly higher interest costs than those included within the October economic forecast.

The Office for Budget Responsibility forecast states that the policy mix chosen by the Chancellor at this Budget will act as a boost to inflation, and it identified in particular the increase in employer National Insurance Contributions, and the large fiscal loosening that took place in the Spending Review. The Prime Minister has advocated high wage growth. As the OBR has shown, there may be some fiscal benefits from inflation if the source of inflation is higher domestic wages rather than from imported and domestic inflation in the price of goods. However, setting out an economic policy of promoting high wage growth that is not accompanied by increases in productivity will be inflationary, and risks contributing to a wage price spiral. The Chancellor showed in his speech that he is alert to the fiscal risks of higher inflation and higher interest rates becoming entrenched. The Treasury should keep these risks at the forefront of their thinking when designing policies at future fiscal events.

Spending Review and the overall tax burden

It was against the backdrop of the Covid pandemic that the Chancellor announced a large increase in departmental spending at this Spending Review, with real-terms increases for all departments. However, the Chancellor also declared his intention to cut taxes later in this Parliament. It already appears to be a significant challenge for the tax burden as a percentage of GDP to be lower at the end of this Parliament than at the beginning, because the Chancellor’s tax rises have already been announced, and his fiscal headroom to reduce them and still meet his fiscal target is small.

It is understandable that total departmental spending is rising at present, and that the UK’s tax burden will rise to levels not seen during peace time, given that the country is still in the midst of a global pandemic, which has at times shut down major sections of the economy and has placed significant demand pressure on many areas of public spending. However, not all departmental spending choices that the Chancellor made were pandemic-related. If the Chancellor wishes to be able to cut taxes later in this Parliament while still meeting his fiscal rules, he may have to identify areas of departmental spending where he can reduce spending in real terms even if this is in the face of increased demand.

Funding of adult social care

Compared to the existing adult social care framework in England of thresholds and the absence of any lifetime spending caps, the Government’s new policy proposals are more generous. All individuals will now have a lifetime cap on contributions where previously there was none. In addition, many more individuals will now be eligible for means tested support. These changes are welcome.

However, when compared to the Dilnot Review’s recommendations that had been legislated for but which have not yet been commenced, the Government’s proposals are less generous in how they treat the means tested contribution made by local authorities. As a result, while most people will pay less as a result of the proposals overall, those who have a longer care journey and have assets of between £20,000 and £106,000 will pay far more towards their own care than they would have done under the provisions of the Care Act 2014. Even if people within this cohort do not as individuals end up needing care, they are still exposed to far greater financial risk of having to contribute £86,000 of their own money in full than would have been the case under the provisions of the Care Act 2014. It is regrettable that a such a large cohort of people are still exposed to the possibility of incurring these high costs, which make up a large proportion of their assets. Compared to the original Dilnot proposals, this will be regressive.

Universal Credit taper rate

We welcome the reduction in the Universal Credit taper rate. It will provide a stronger incentive for many to take on additional work. The additional money will be welcome for many households. However, the taper rate reduction will be of no benefit for recipients of Universal Credit who are not able to work. The Government should think carefully about how it intends to support such people, given the increases in the cost of living that are emerging.

Announcements on funding of social care

For both social care announcements, the House was asked to vote on new government policies that came with significant distributional impacts for households, without the usual distributional analysis that would be provided alongside a Budget. That was highly unsatisfactory. For major announcements such as this the Government should always provide Parliament, in good time, with the information required to enable Parliament to make an informed decision. The Government’s social care plans had been under development for a number of years, and it is not clear why the necessary distributional analyses, both by region and by household, were not provided at the time the House was asked to vote. Nor is it clear why the announcements on social care were made in two distinct stages.

Budget measures pre-briefing

We are deeply concerned that the rate of the National Living Wage was disclosed to ITV in an unauthorised fashion prior to the Budget, and we agree with the Treasury that this could have caused confusion in the market as to whether the information was accurate.

The rate at which the National Living Wage is set will clearly affect some companies and sectors which have large numbers of staff at the minimum wage more than it affects others who do not. Some of those firms will be listed on the stock exchange. We therefore believe that the policy may be considered to be inside information as defined by the FCA’s Best Practice Note on the Market Abuse Regulations. In addition, given that the ONS deems retrospective wage data to be market sensitive, we believe it is not unreasonable to conclude that the announcement of the change to the National Living Wage rate might have been market sensitive.

The Committee acknowledges that certain Budget measures might be released prior to the Budget, in line with the Treasury’s “Macpherson principles”. However, under no circumstances should market sensitive policies be able to enter the public domain in a disorderly fashion.

The Permanent Secretary to the Treasury has written to us stating the Government will review the arrangements for such policies ahead of future announcements. Given the potential opportunity for disruption that this unauthorised leak could have caused, the Government should investigate how this policy came to be leaked prior to the Budget, and should publicise its findings.