Rishi Sunak on Wednesday offered pain relief to households facing a crippling cost of living crisis, but he banked most of a £50bn windfall in the public finances as the country enters dark economic times.
The chancellor hopes to use some of that money for pre-election tax cuts, but his allies expect he will have to offer a much bigger household rescue package in the autumn, as runaway inflation and higher energy bills bite.
Labour claimed the tax cuts contained in Sunak’s Spring Statement were nowhere near enough to offset a fall in living standards not seen since comparable records began in 1956 and some Tory MPs privately agreed.
The chancellor’s package featured a £6bn national insurance cut for 30mn workers and a one-year 5p cut in fuel duty costing £2.4bn, which he claimed showed he was “on the side” of struggling families.
But it nevertheless left households facing a significant squeeze in living standards, with official forecasts showing that inflation was likely to peak at a rate close to 9 per cent towards the end of the year.
The cap on domestic energy bills is expected by the independent Office for Budget Responsibility to rise to £2,800 in October, while public sector wages are expected to fall far behind inflation.
The OBR cut its growth forecast for 2022 from 6 per cent to 3.8 per cent and warned that household disposable incomes would fall 2.2 per cent; they were unlikely to return to pre-pandemic levels until the end of 2024.
While Sunak hopes to have headroom for a pre-election income tax cut, he admitted: “We should be prepared for the public finances to worsen, perhaps considerably.” Sanctions imposed on Russia were “not cost-free”.
In an attempt to reassure Tory MPs that he is a tax-cutter, Sunak took the rare step of pre-announcing a 1 percentage point reduction in the 20p basic income tax rate in 2024, ahead of a general election, costing £5bn.
But the £6bn cut in national insurance will be wiped out by a £12bn NICs rise — the new health and social care levy — that will take effect next month. Many Tory MPs wanted him to cancel that rise.
A snap YouGov poll found that 69 per cent of people thought Sunak had not done enough to help people with the increased cost of living.
Despite the giveaways in national insurance and fuel duty — and the prospect of a 1p cut in income tax — the OBR concluded that Sunak was still engaged in a long-term increase in taxes.
“Net tax cuts announced in this Spring Statement offset around a sixth of the net tax rises introduced by this chancellor,” the OBR concluded.
That reflects the fact that Sunak is set to raise tens of billions of pounds from last year’s freeze in income tax thresholds, the NICs headline increase and a jump in corporation tax next year from 19 to 25 per cent.
With inflation and interest rates rising, Sunak said the rising cost of servicing Britain’s debt made it essential that he stuck to his fiscal rules of balancing day-to-day spending within three years with room to spare.
The chancellor’s biggest immediate tax cut came when he promised to equalise the thresholds of national insurance and income tax at £12,570, at a cost of £6bn, from July.
He said that would amount to a £330 tax cut for 30mn people, calling it the “biggest single personal tax cut in a decade”. It will help people on lower pay and in effect halve the £12bn he expected to raise from his national insurance rise next month.
Separately, the chancellor confirmed that his new “tax plan” would include proposals to try to boost Britain’s growth rate, which is forecast to typically run at about 1.8 per cent over the next five years.
There would be a shake-up of tax reliefs for investment and research, and a review of the apprenticeship levy, with details to follow in his autumn Budget.
Small companies will see an increase in the employment allowance from £4,000 per worker to £5,000, a measure that will benefit them by £435mn.
The chancellor ignored Labour calls for a one-off tax on North Sea energy companies, arguing that he needs them to invest in offshore exploration and renewable schemes to bolster the UK’s energy self-sufficiency.
Labour said Sunak should have cancelled the national insurance rise and introduced the energy windfall tax. “It is clear the chancellor doesn’t get the scale of the challenge,” shadow chancellor Rachel Reeves said.