Chancellor provides minimal support to households in the event of a cost of living crisis

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Rishi Sunak’s spring statement on Wednesday offered minimal short-term relief to British households reeling from the cost of living crisis. Instead, the Chancellor focused his fiscal firepower on building up a war chest for pre-election giveaways.

This decision confirmed Sunak’s priorities. Soaring inflation has generated a huge windfall of extra tax revenue for the Chancellor out of stealth, and he has opted to go back only a little to the British, in the most eye-catching way possible.

First, he unveiled a 5p cut over a year in fuel taxes, from 6 p.m., as well as a £6billion cut on National Insurance for 30 million workers who will apply from July.

Second, he pre-announced a 1 percentage point reduction in the basic income tax rate of 20 pence which will come into effect in 2024 – the most likely year of the next general election. “For the first time in 16 years, the basic income tax rate will be reduced,” Sunak said.

Despite these measures by the Chancellor, Britain’s budget watchdog said the tax burden as a percentage of national income was set to rise to 36.3% in 2025-26: its highest level since just after World War II, and exceeding official forecasts. of last October.

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This partly reflects Sunak’s moves to raise national insurance contributions, freeze income tax thresholds and raise corporate taxes.

But the math behind the smoke and mirrors of the Chancellor’s speech in the House of Commons is relatively simple and concerns the effects of higher inflation on the economy, public finances and household living standards.

The Office for Budget Responsibility expects inflation to peak at around 9% by the end of 2022, the highest rate in more than 40 years. This will reduce household disposable income by 2.2% in 2022-23, which the fiscal watchdog has estimated to be “the biggest drop in a single fiscal year since [official] recordings began in 1956-57”.

With real disposable incomes not expected to return to pre-pandemic levels until 2024-25, Aveek Bhattacharya, an economist at the Social Market Foundation, a think tank, said: “The hit to living standards should be d of a magnitude similar to the worst recessions.

Line chart of real household disposable income per capita (2019-20=100) showing that UK living standards are expected to be hit hard

Dave Innes, head of the economy at the Joseph Rowntree Foundation, a charity, expressed fury that the most vulnerable families and pensioners are receiving little or no immediate support with the rising cost of living.

“The choices the Chancellor has made today will bring no security to those at the height of this crisis, instead he has abandoned many to the threat of misery,” he said. declared.

Amid Russia’s invasion of Ukraine, it’s no surprise that economic growth forecasts have been scaled back. Compared to growth of 6% in 2022 and 2.1% in 2023 in its October forecast, the OBR now thinks the economy will only support expansion of 3.8% and 1.8%, respectively. . Thereafter, he envisages some catch-up with respect to the previous economic trajectory.

Column chart of GDP growth (%) showing that economic growth was stronger than expected last year, but forecasts for 2022 have been reduced

Utilities will also suffer from higher inflation, for which they received no compensation from Sunak. Jonathan Portes, professor of economics at King’s College London, said that with higher energy bills and other costs, the lack of compensation meant “pay cuts for . . . nurses, teachers and the police, with cuts in the quantity and quality of service delivery”.

Unlike the pain that will be suffered by households and the public sector, higher inflation brings extra money into treasury coffers without the Chancellor raising tax rates. In effect, it increases the nominal value of all the goods and services produced on which taxes are levied.

The OBR has calculated that the additional tax revenue resulting from soaring inflation represents a windfall of around £35bn a year for Sunak, only part of which has to be spent on higher costs of servicing the public debt and social benefits.

As well as a one-time bad year in 2022-23, the OBR estimated that Sunak would earn at least £15 billion more a year from higher tax revenue than he is forced to spend on the service of the debt and increased benefits.

Bar chart of the evolution of the forecast between October 2021 and March 2022 (in billions of pounds sterling) showing that the improvement in tax revenues far outweighs the increase in debt servicing costs

Sunak then had a choice to make: should he compensate the British and the utilities for their losses with his windfall, or should he put the money in the bank?

In the current financial year, it has earned a £50bn windfall, which has been banked. For years to come, it has decided to give back to the tax-paying public a net amount of a few billion of its £15 billion annual windfall.

This giveaway is at its highest in 2024-25, the likely year of the next election, but even then it is still just £3.6bn net.

Sunak made it seem like the giveaways were much bigger than that, but, again, smoke and mirrors were at work.

He said cutting fuel duty by 5p on a liter of petrol and diesel would cost more than £5billion this year, but Treasury documents show an outlay of just £2.4billion . The difference stems from the fact that the Chancellor calculated the cost from a fictional world in which the fuel tax rate was higher than it actually is.

The Institute for Fiscal Studies, another think tank, said the cost of Sunak’s tax and national insurance changes in the spring statement were more than paid for by the extra revenue gained from freezing tax thresholds. on income for four years at a time well above expected inflation.

Paul Johnson, director of the IFS, said: ‘Almost all working people will pay more tax on their earnings in 2025 than they would have paid without this parliament’s income tax and contribution reforms. National Insurance, despite the tax cuts announced today.”

In addition, these tax cuts are offset by large increases in the amount of loan repayments new graduates will face over their working lives.

This spring statement was intended to deflect attention from stealth tax increases and real government spending cuts. Or, as Torsten Bell, chief executive of the Resolution Foundation think tank, put it on Twitter: [and] you have already announced an increase in national insurance.

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