One sometimes feels sorry for Rishi Sunak, chancellor of the exchequer. He wants to cut taxes and unleash enterprise. But he has orthodox fiscal convictions and a prime minister who wishes to spend public money on causes Sunak thinks wasteful. Balancing these forces would always be hard. But the economy has also been buffeted by Covid-19 and now the Russian invasion of Ukraine. Yet these shocks have also given Sunak a surprise windfall, namely, higher than expected inflation. That reduces the real value of cash-limited spending and increases real fiscal revenue, chiefly because thresholds are frozen in cash terms. So Sunak had money to play with. The story of this Spring Statement is how he used it. In essence, he gave his backbenchers some of what they wanted. Will it work?

We can identify a fairly simple reason for doubting it will do so for very long. According to the Office of Budget Responsibility, aggregate real household disposable incomes will decline by 2.2 per cent in real terms between 2021-22 and 2022-23. This would be the steepest annual decline in at least 66 years. Gross domestic product per head is forecast to rise by 1.5 per cent from 2022 to 2023. But this will mean little to a large proportion of the population, especially the poorest, who are more vulnerable to jumps in the prices of energy and food than better off members of society. It is possible that things will turn out better than this: maybe the war will cease and the economy soon return to something that feels normal. One must doubt it. This is a time of uncertainty. But it seems likely that the external shock will persist and domestic monetary policy have to tighten far more than hoped. (See charts.)

The chancellor could certainly have done more in response to the rise in the cost of living. Cumulative borrowing from 2021-22 to 2025-26 is now forecast to be £72bn lower than in October 2021, with almost 80 per cent of this improvement in 2021-22 alone. Public sector net debt is also forecast to fall from 96 per cent of GDP in 2021-22 to 86 per cent of GDP in 2025-26. In sum, Sunak plans to spend remarkably little of his windfall in the coming years: the direct effects of the government’s decisions will be to raise cumulative borrowing by just £15bn over the next four financial years.

In order to repair the public finances after Covid and meet pressures for higher public spending, the government took policy measures that, according to the OBR, would have raised tax by 2.4 per cent of GDP between 2019-20 and 2026-27 (0.9 per cent via corporation tax, 0.6 per cent via freezes on income tax thresholds, 0.6 per cent via the “health and social care levy”, and the rest from other measures). Sunak has now announced offsetting cuts of just 0.5 per cent of GDP (0.1 per cent via the freeze on fuel duties, 0.2 per cent via the planned cut of 1p in the pound in the basic rate of income tax and 0.2 per cent via the rise in thresholds on employees’ national insurance contributions).

Sunak, it is clear, is still a tax-raising chancellor. He has also kept what looks to be substantial powder for more election-fighting fireworks. But he has lowered fuel duties by 5p in the pound, though (supposedly) only for a year. He has given up a third of the supposedly hypothecated revenue from the new levy, by cutting the burden for 70 per cent of payers by more than the levy would have cost them. Not least, he has renewed the totemic promise of lower rates of income tax. But he has done next to nothing to relieve what is going to be a far bigger squeeze on living costs than imagined a month ago, especially for the poorest people, whose benefits are fixed in cash terms until the next uprating. Moreover, what he introduced in February was already too little and poorly allocated across households.

The politics are to support the marginal voter and soften the burden of the unpopular health and social care levy. But he is leaving most of the hit to living standards unaddressed and the most vulnerable significantly worse off. It is hard to see a good justification for this.

Will it at least be good politics? I suspect not. Yes, he will get cheers from supporters today. But unless the squeeze on living standards turns out to be smaller than is now expected, the general mood will remain grumpy.

Sunak, people may well feel, has done too little. His promises to rejig the tax system, to reignite growth, will seem pie in the sky. He should have gone for a windfall tax and distributed more to the worst hit. He chose a more conventional, albeit still highly political, path. He may have to do far more quite soon.

martin.wolf@ft.com

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