With inflation confirmed at 6.2% and expected to increase, the Chancellor of the Exchequer was expected to deliver on the cost-of-living and energy security crises in today’s statement.
Today, the Chancellor of the Exchequer Rishi Sunak delivered his Spring Statement outlining short-term tax changes and long-term ambitions around economic policy.
Ahead of the statement, inflation was confirmed at 6.2% and is expected to rise further, amping up the expectations that the Chancellor would have to deliver on the escalating cost-of-living crisis.
The statement covered how to deal with the rising cost of energy and the need for security of supply following Russia's invasion of Ukraine. These topics were also explored in a recent ICE Presidential Roundtable.
Here are five things announced in the statement relevant to infrastructure and energy.
1. Tax exemptions for energy-saving home improvements
The Chancellor announced that solar panels, heat pumps, and other energy-saving home improvements will have VAT reduced from 5% to 0% for the next five years.
Wind and water turbines will also become eligible, and the complexity of eligibility conditions will be reduced.
The move is an attempt to help reduce energy costs for households over the long term by encouraging investment in domestic renewables now.
2. Reliefs for non-domestic green energy generation brought forward
Furthermore, previous measures from the 2021 Budget and Spending Review have been brought forward from April 2023 to April 2022.
These include business rate exemptions for onsite non-domestic renewable energy generation and storage, and 100% reliefs for low-carbon heat networks.
Similarly to homes, these measures are designed to encourage people to invest now in energy saving to reduce bills over the long term.
3. Cut to tax on petrol and diesel
Widely trailed, the Chancellor confirmed a cut in fuel duty by 5p a litre for 12 months.
Designed to directly benefit motorists immediately, the cut comes off the back of a decade of the duty being frozen.
It raises questions about the long-term sustainability of tax revenues, something ICE has raised before, particularly coupled with the fact that…
4. Electric vehicle uptake is increasing rapidly
Not mentioned by the Chancellor, the Office for Budget Responsibility (OBR) states that the largest long-term fiscal cost of decarbonisation is the loss of revenue from motoring taxes, including fuel duty and Vehicle Excise Duty (VED). ICE has raised this issue for a number of years.
The shift to fully electric vehicles (EVs) is progressing more quickly than the OBR had anticipated. In 2021, 11.6% of cars sold were EVs compared to the OBR’s forecast of 9.5%.
Based on this trend and previous patterns of new technology uptake, the OBR has significantly revised the assumed path of EV market share upwards to 59% in 2026-27. This is up from just 29% for the same period in October 2021’s forecast.
5. Second round of levelling up funding announced
The Spring Statement also included confirmation that the second round of the Levelling Up Fund would be launched.
The fund seeks to allocate £4.8bn for local infrastructure projects, with £1.7bn already distributed.
The recent white paper provided a bit more detail on the ambition behind levelling up, which may help to make bids more strategic.
Meanwhile, our ongoing consultation seeks insight on how the levelling up agenda can be supported more firmly by infrastructure investment. Submissions close on 8 April 2022.
ICE's view on the 2022 UK Spring Statement
The Chancellor's solutions to the cost-of-living crisis, such as the fuel duty cut, will help remove some of the financial burden for those in need.
Eliminating VAT on energy-saving home improvements will also help to convince households to invest if they can afford it.
The government is also working on an energy security strategy. This must seek evidence from the National Infrastructure Commission to design and deliver a realistic and stable change in the energy system – one that guarantees the security of supply while costs and carbon come down.
There are many options to avoid turning the cost-of-living crisis into a deep-rooted one.
A realistic and decisive plan moving towards a lower cost of operation for the UK infrastructure system is needed, and starts with decarbonising energy rapidly by 2030.
With a faster than expected uptake in EVs, the impact on the £36bn revenue currently raised from motoring taxes will become apparent a lot sooner than anticipated.
A combination of decreased fuel duty and VED receipts alongside more generous capital allowances for EVs through the corporation tax regime has resulted in the OBR forecasting a £2.1bn revenue reduction to the Treasury in 2026-27.
The need for change in motoring taxes has become more pressing. ICE has estimated that the government has until the end of the decade to implement a fair, reliable and sustainable system that replaces fuel duty and Vehicle Excise Duty.