Inflation and its headline label, the cost-of-living crisis, have now become the focus of economic attention.
When the Chancellor presented his Autumn Budget on 27 October 2021, the UK economy appeared to be emerging from the pandemic, with the Omicron variant yet to arrive. Back then, the most recent reading for CPI inflation (September 2021) was 3.1%, which the OBR formally projected would peak at 4.4% in 2022. By November 2021, CPI inflation was 5.1%, while the latest reading (for February 2022), released on the day of the Chancellor’s statement, is 6.2%.
Last week the Bank of England upped its inflation forecast once again, pencilling in 8% for April, with the risk of a higher rate still in October if current energy prices are maintained. However, in 2023 the Bank believes inflation will ‘fall back materially’, nearing the official target of 2% on a two to three year horizon.
The OBR is broadly in agreement with the Bank. Its new Economic and Fiscal Outlook (EFO) report sees inflation ending 2022 at 7.4%, but then dropping to 4.0% a year later and to just 1.5% in 2024.
Meanwhile the current rise in inflation has been a two-edged sword for government finances:
- On the plus side, inflation is boosting tax receipts. For example, yesterday’s public sector finance figures showed that so far in 2021/22, PAYE income tax receipts are 13.6% higher than for the same period in 2020/21 and VAT receipts are up 18.8%.
- On the downside, the cost of servicing government debt, including over £500 billion of (RPI) index-linked stock, has risen sharply. With one more month of the financial year remaining, interest payments are already £29.5 billion (78.6%) higher than at the same point in 2020/21.
The debt and inflation combination was apparent in public sector finance figures published just before the Spring Statement. The Chancellor looks to be undershooting the OBR’s Autumn borrowing forecast for 2021/22 by over £25 billion and that gave him the wiggle room for some larger than expected giveaways.
@ Copyright 23 March 2022. All rights reserved. This summary has been prepared very rapidly and is for general information only. You are recommended to seek competent professional advice before taking or refraining from taking action on the basis of the contents of this publication. The guide represents our understanding of the law and HM Revenue & Customs practice as at 23 March 2022, which are subject to change.