Never mind the debt – the Ukraine crisis calls for tax cuts and higher spending



Domestic energy bills are already set to jump in April, taking headline inflation above 7pc. But the Ofgem cap, for all its faults, will protect most households from any further increases, at least until October.

There will still be some near-term impact. If oil and gas prices remain high, motorists and businesses will have to pay more for fuel, and this will inevitably be passed on in other prices.

But the energy markets had already factored in plenty of Russian risk, and a combination of sensitive contingency planning and warmer weather could soon take the pressure off.

None the less, there is a real threat of a much worse outcome. Prices could still rise a lot further if the flow of Russian energy is seriously disrupted, whether by western sanctions or Russian retaliation. UK inflation could then peak at an even higher rate, perhaps 8pc to 9pc, and be much slower to fall. This threat alone could undermine the recovery, especially as consumer confidence has already been battered by concerns about the cost of living and tax rises.

The second reason why the Ukraine crisis should prompt a rethink is that it changes the outlook for the public finances – and not necessarily for the worse.

It is often assumed that inflation is bad here because it adds to interest payments, both directly (via RPI index-linked gilts) and indirectly (especially if it prompts the Bank of England to raise official interest rates, or unwind its purchases of government bonds). , more quickly).

But this is only part of the story.

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Crucially, the combination of rising nominal incomes and higher prices also means that households and businesses will pay more tax.

Indeed, so far the overall impact appears to have been favourable. Between April and January, government borrowing was £17.8bn below the official forecast published by the OBR in October.

Higher nominal growth also reduces the burden of debt relative to national income. Net public debt stood at 94.9pc of GDP in January, 2.1pc of GDP below the October projection.

The downside risks to the economy have therefore increased, but the improvement in the public finances gives the Chancellor more room to respond. He should take it.

It would now be much easier to justify delaying the tax hikes planned for April. The economy is facing a new shock that was not anticipated when the increases in National Insurance were announced last September. And when households and businesses are already paying more tax than expected, it makes even less sense to add to their burden.

There is also a strong case for doing more to ease the pain of higher energy bills. The Government should continue to resist calls for more intervention to manage overall inflation (that’s the Bank of England’s job), or to set individual prices (that should be left to the markets).

But it is reasonable to expect the Government to worry about the distributional implications of high inflation, and to do more to protect the most vulnerable households. Ideally this should be done via the tax and benefit system, making work pay, and targeting help at those who need it most.

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The Government has already done many good things here, including reducing the Universal Credit taper rate (although the loss of the £20 uplift still leaves many worse off).

However, the response to the rise in energy bills has missed the mark. The additional support of “up to £350 per household” comprises a £150 Council Tax rebate, which is not well targeted, and a £200 “discount” on bills, which is actually just a loan. I think it would have been better to do more on the Warm Home Discount, increasing the amount as well as expanding the eligibility, and to top up Universal Credit again to help with other costs (this is not just about energy).

Policies that simply lower energy bills for everyone (the French solution) are a distant second best. These policies are expensive and prevent markets from working properly. People who can afford to pay higher prices for energy should be expected to do so.

None the less, if energy prices continue to arise, the Chancellor could knock another £200 or more off household bills by removing some of the environmental and social charges (specifically, the cost of ‘legacy obligations’), and by scrapping the 5pc VAT on domestic energy (even if extending this to Northern Ireland would breach the agreement with the EU). VAT is one of the least bad taxes, and any reduction should be temporary.

But the Chancellor has already cut VAT on hospitality as an emergency measure. Reducing energy bills would surely be an even better cause.

In short, sound finances cannot just be about sticking rigidly to plans when circumstances have changed. Sometimes, even the most “fiscally responsible” Chancellor needs to be flexible.

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Julian Jessop is an independent economist. I have tweeted @julianhjessop.




www.telegraph.co.uk

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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