Spring Statement Summary
Low On Energy
Sticking with oil, Sunak reaffirmed his earlier commitment that the government would be cutting fuel duty by 5p in an attempt to reduce prices at the pumps which have surged to 165.9p per litre for petrol and 177.3p per litre for diesel. It is estimated that this policy will cost the Treasury around £2.5bn a year in lost tax receipts and represents a change in direction from the current 58p charge which has been frozen for over a decade. Nevertheless, as the shadow Chancellor was keen to point out, this cut will only reduce the cost of filling up a tank by around £2. Hence, with many analysts predicting a further inflation at the pumps, the effectiveness of the tax cut would likely be downed out by the overall price increase.
Indeed, this morning the Financial Times has compiled a list of top oil traders who warn that the cost of oil could surpass $200dpb given that international sanctions on Russia could cut 3m barrels a day from global supplies. For example, Doug King, head of RCMA’s Merchant Commodity Fund stated that oil prices would rise to between $200 and $250 a barrel this year. Similarly, after stating that he “think[s] we’re losing the Russian supply on the European side for ever”, hedge fund manager Pierre Andurand also predicted that crude oil could hit $250dpb. To put this in perspective, when looking at inflation adjusted crude oil prices, the all-time peak surpassed $162 in June 2008, while the $38 peak in oil prices following the 1979 Iranian Revolution is the equivalent of paying just shy of $140dpb today. Hence, with Crude currently trading around $114dpb and Brent exceeding $121 this morning, the prospect of oil exceeding $200dbp would put it in truly unchartered territory, causing sever strains on the global economy and exacerbating inflationary pressures.
Fuel costs are understandably the headline grabber, but the knock-on effect of the war in Ukraine ranges across commodities and throughout the supply chain. A perfect example of this is that South American beef prices are increasing because they are expecting thinner cows and a lower yield as a result of the crisis. This may sound a bit of a stretch, but Russia and Belarus are ranked two and three in the world as potash producers, which is a major component in fertilizer. With the sanctions in place on both countries, prices have almost doubled since the war began and with the increased cost of shipping because of fuel costs, the price of a ton of delivered fertiliser has gone through the roof, which means less will be used, which means less grass, lighter cows and less beef. The wider implications are that if soils are not tended to properly then harvests could collapse all together, which again has knock-on effects globally – soybeans grown in Brazil for example are exported to China to feed pigs. In the developed world this all manifests as higher food prices, but in the developing world it may manifest in food scarcity and even famines. Ukrainian grain exports are being blockaded and farmers in the country can not fuel their tractors to tend their fields. A country like Egypt for example imports 60% of its grain and 80% of those imports were from Russia and Ukraine; with prices spiralling the government have capped the price of bread and are also paying a lot more in subsidies, which is weighing on their budgets. For this government it’s not just about feeding their people, it’s about avoiding civil unrest that will follow if they can’t keep on top of it. Such an integrated global supply chain has led to the improvement in livelihoods for billions of people so it seems ludicrous that one man can be responsible for wrecking it.
Other Developments on the Spring Statement
In an effort to try to provide some comfort to this issue, Sunak announced that the Basic rate of income tax will be cut from 20% to 19% before the end of this parliament in 2024, with the government predicting that this will cost the Treasury around £5bn. However, to put this into context by 2025-6 it is expected that the tax to GDP level will rise by over three percentage points compared against 2019-2020.
Surrounding all of these statements is the fact the chancellor stated the UK’s debt interest bill this year will be £83bn which represents four times last year’s amount and is higher than the combined spending on Education and Justice. And behind this figure is the fact that public debt has surged to 95% of GDP – its highest level since the 1960s. While the government expects that this will fall to 83% by 2026-27, the last three years have demonstrated that the no government or individual can predict what lies around the corner. The unknown unknowns as some may put it.
Have a great day.