Spring Statement 2022: Rishi Sunak needs to take care not to count his chickens

By John Endacott, Head of Tax at PKF Francis Clark

Two statements by Rishi Sunak in his Spring Statement on 23 March particularly caught my attention:

“In the next financial year we are forecast to spend £83bn on debt interest, the highest on record and almost four times the amount we spent last year”
“By 2024, the Office for Budget Responsibility (OBR) currently expects inflation to be back under control, debt falling sustainably and the economy growing”

The first of these is sobering bearing in mind Bank of England base rate is 0.75% and the second, speaking as an accountant, is concerning.

GDP is forecast to grow by 3.8% over the next 12 months and then be just under 2% a year for the four years. Quite a rosy outlook, given the downside risks to the economy and it assumes that there will be no recession.

About a quarter of UK government debt is index linked and so directly influenced by the inflation rate. More generally, interest on government debt being issued is dependent on global interest rates and the exchange rate for sterling.

The government will be issuing new debt, in part as existing debt comes to maturity, but also because the Chancellor told us that we are forecast to borrow a further £252bn over the next five years. Broadly, £150bn over the next two years and then £35bn a year.

Prior to Rishi Sunak standing up, it had been announced that CPI inflation had increased to 6.2% in the year to February 2022 (up from 5.5%) and that RPI had increased to 6.8%. Fairly chilling numbers and the outlook is for significant further increases later this year.

The Federal Reserve in the USA is looking to increase interest rates significantly this year to try and bring inflation down across the Atlantic. Global interest rates and inflation will have an impact on the sterling exchange rate. In many ways we are fortunate to have the level of independence that we have for our economy. It might enable us to be a more nimble vessel – or we might just get buffeted by the waves. Time will tell and it is not something that we, or our clients, can do much about.

As accountants, we look for the downsides in everything. Hence, we’re not the best people to invite to a party, but it is what our clients expect from us. The numbers in the Spring Statement are forecasts. They are the best guesses of the people asked to prepare them – although politics naturally influences them. For those of us who remember the 1960s, ‘70s and ‘80s, it is important to remind clients of the perils of high inflation and the effect of shorter economic cycles with regular recessions.

Hopefully there are much better times ahead, but there is not much fat in these forecast figures and there is plenty of downside risk in the world right now. I would advise caution, hope that the Chancellor does not count his chickens and suggest that clients should have plans in place for if the economy does not turn out as rosy as the OBR currently expects.