The Office for Budget Responsibility (OBR) issues a Fiscal Risks Report (FRR) every two years, which takes a longer view of the UK’s financial position and the risks it faces. The latest FRR published in July 2021 focuses on three areas:
1. Coronavirus (Covid-19) pandemic: The medium and long term impact of the coronavirus pandemic on public finances. The OBR says that despite all that has been spent to date, there is an as yet unfunded need for another £10 billion a year to cover:
• NHS programmes such as test and trace, revaccinations and the backlog of 3.5 million elective treatments.
• catch-up schooling for pupils.
• “the holes in the fareboxes” of the railways and Transport for London, created by the collapse in passenger numbers.
2. Climate change: The risks to the public finances of getting to net zero emissions by 2050. The OBR highlights one elephant in the room that would frighten any policy maker: the loss of revenue from fuel and excise duties in an all-electric world, worth about 1.5% of UK Gross Domestic Product (GDP) – £33 billion. In the short term, some of the lost income may be replaced by carbon taxes, but in the long term the hole will have to be filled.
3. Government debt: The sensitivity of the public finances to debt, global interest rates, inflation and a loss of investor confidence. Government debt is currently equal to about one year’s output of the UK economy, compared with 40% in 1980. However, at present, the net interest the government pays on that debt is less than a quarter of the 1980 bill (as a proportion of GDP) due to ultra-low interest rates. But a small rise in rates would increase that cost significantly.
Signs of tightening the purse strings
The government has recently announced two significant changes that will help to ease some of the pressures on public finances, but pass the burden on to the public:
- The State Pension is increased annually by the higher of inflation, as measured by Consumer Prices Index, 2.5% or increase in average earnings.
The pandemic has led to an estimated 8% rise in average earnings between May and July 2021, as people come off furlough and return to full pay, and having to increase State Pensions by this amount would put a further strain on the public finances. Work and Pensions Secretary, Therese Coffey has said the triple lock will be suspended for 2022-2023. Instead, the State Pension will be determined by either the inflation rate or 2.5%. but that the triple lock would then be restored for the remainder of this Parliament, which ends in 2024.
- The new Health and Social Care Tax – From April 2022, there will be a 1.25% increase in National Insurance Contributions (NICs) paid by workers, with an additional 1.25% being paid by employers. This will then become a separate tax on earned income from 2023.
The extra tax will be used to fund social care in England and help the NHS recover after the pandemic. The government expects the changes to raise £12 billion a year, which will go initially towards easing pressure on the NHS and then be moved into social care system over the next three years.
The Health and Social Care Tax does not apply in Scotland where different tax bands apply.
How will these changes affect you?
Most people will either feel the impact of higher National Insurance contributions or a lower increase in the State Pension.
Many of our clients are taking the opportunity to reassess and review their financial plans and their budgets following the pandemic. Given this gloomy outlook in the report and these changes to State Pension and NI, it seems that the Chancellor, Rishi Sunak, has little wriggle room for any Budget generosity. The Budget is set for 27 October and we will provide you with highlights on the day and a report the following day covering the financial impact of any changes and key actions you may need to take.
Our advisers can help you to plan ahead and get the most from your investments and adjust your plans to reflect any changes in circumstances.
The value of tax reliefs depends on your individual circumstances. Tax laws can change.
The Financial Conduct Authority does not regulate tax advice.
This article is intended to be for information only and should not be taken as financial advice.
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CA7121 Exp 09/2022