Britain is heading for its biggest fall in living standards since the 1950s this year, despite a mini-budget in which chancellor Rishi Sunak slashed £330 off National Insurance for the average worker and took 5p off the tax on a litre of petrol.
The chancellor also promised a 1p cut in the basic rate of income tax in 2024, in what was immediately denounced as a pre-election bribe.
But he did nothing for the poorest, who see welfare benefits far outstripped by inflation which is expected to reach almost 9 per cent this year. And he rejected opposition calls for a windfall tax on the bumper profits of North Sea oil and gas companies to pay for a cut in VAT on energy prices, eight days before domestic bills are set to rise by an average £600.
The government’s official forecasters, the Office for Budget Responsibility said that the impact of rising prices will mean real household disposable incomes per person falling by 2.2 per cent in 2022/23 – “the largest fall in a single financial year since ONS records began in 1956/57”.
The OBR said that changes announced in Mr Sunak’s spring statement – billed by the Treasury as the largest tax cuts for a quarter of a century – did no more than remove one-sixth of the tax hikes he had previously announced since becoming chancellor in 2020.
Even after the £6bn cut in National Insurance contributions (NICs) coming into effect in July and the £5bn reduction in income tax in 2024, the OBR said that the overall tax take will rise from 33 per cent of GDP in 2019/20 to 36.3 in 2026/27 – its highest level since the 1940s.
The respected Institute for Fiscal Studies thinktank said that the total impact of changes introduced by Mr Sunak will see almost all workers paying more tax on their earnings in 2025.
The IFS said Sunak was “giving with one hand on tax, having previously taken away with the other”, as unexpectedly high inflation saw his freeze on income tax thresholds turn into a massive revenue generator, more than paying for the spring statement giveaways.
The chancellor won room for manoeuvre from a £15bn windfall from additional tax receipts, as well as £5bn from increased student loan repayments, giving him the flexibility to pre-announce a cut in the basic rate of income tax to 19p – its lowest level since the First World War – without breaking his fiscal rules.
But the OBR warned that uncertainties resulting from the Ukraine war and highly volatile energy prices meant that his calculations “could be wiped out by relatively small changes to the economic outlook”.
And Mr Sunak himself warned MPs: “We should be prepared for the economy and public finances to worsen. potentially significantly.”
IFS director Paul Johnson said that Mr Sunak’s changes will make the tax system “both less equitable and less efficient”, increasing the gap between high-taxed earnings from work and lower taxes on pensions and unearned income.
And he said that the chancellor left cash settlements for public services unchanged, meaning that the real-terms value increases announced in the autumn budget for everything from the NHS to schools will be eroded by around 10 per cent.
But most significantly, he said that the chancellor had “done nothing more for those dependent on benefits, the very poorest, besides a small amount of extra cash for local authorities to dispense at their discretion”.
Mr Johnson warned: “Their benefits will rise by just 3.1 per cent for the coming financial year. Their cost of living could well rise by 10 per cent.”
Trussell Trust chief executive Emma Revie, said the decision would mean “many more people will have no option but to use a food bank”.
And Labour Treasury spokesperson Pat McFadden said Mr Sunak had “left households and businesses to fend for themselves in the middle of a devastating cost of living crisis”.
Mr McFadden said: “Rishi Sunak is raising taxes again and again, only to offer crumbs just before an election. This is a cynical chancellor who is asking struggling families to pay for the Tory election campaign. The British people will see through it.”
In a spring statement to the House of Commons which was hastily rewritten as the Ukraine war threw Mr Sunak’s plans into disarray, the chancellor acknowledged that the UK’s decision to impose sanctions on Vladimir Putin will not be “cost-free” for Britons.
But he said: “This statement puts billions back into the pockets of people across the UK and delivers the biggest net cut to personal taxes in over a quarter of a century.
“Cutting taxes means people have immediate help with the rising cost of living, businesses have better conditions to invest and grow tomorrow, and people keep more of what they earn for years to come.”
The Treasury said that the increase in the NICs threshold for employees will offset in full for 70 per cent of workers the cash they stand to lose from the introduction of Mr Sunak’s 1.25 per cent Health and Social Care Levy in April, without reducing the £12bn additional funding for the health and care system.
Meanwhile, the 5p cut in fuel duties will save an average one-car family around £100 a year, at a cost of £2.4 billion. But the saving will end in March 2023, when duties are due to jump by 6p in a single leap.
The chancellor also offered zero-VAT rating for green home improvements including the installation solar panels and heat pumps to help the UK’s switch away from dependence on fossil fuels from Russia.
And he doubled to £1bn a household support fund for councils to make discretionary grants to residents in financial distress.
Liberal Democrat leader Sir Ed Davey said that the OBR figures showed the combined impact of Mr Sunak’s actions as chancellor will mean Britons’ paying a total of £43.8bn more in tax in 202/25.
“Rishi Sunak is trying to swindle the British public by burying the true cost of his disgraceful tax hikes,” said Davey. “He has insulted millions of squeezed families across the country by thinking he can hide this in the small print.”