Sunak faces backlash over mini-Budget forecast to drive 1.3m people into poverty
Rishi Sunak is facing a backlash from Conservative MPs after warnings that his mini-Budget will drive 1.3m people – including 500,000 children – below the poverty line this year.
Analysis of the chancellor’s spring statement by the Resolution Foundation think tank found that Mr Sunak’s refusal to upgrade welfare benefits to keep pace with soaring inflation will leave low and middle-income households “painfully exposed”.
And the chancellor was branded an “illusionist” by the Institute for Fiscal Studies after it emerged that seven out of eight workers can expect to pay more tax in 2024-25, despite Mr Sunak’s claim that his spring statement had delivered the biggest tax cuts in 25 years.
Mr Sunak faced ridicule on social media after borrowing a supermarket worker’s car for a photoshoot showing him filling the tank to publicise his 5p cut in fuel duty, and then struggling to use a contactless card to pay for it – with his own money. He also got in a tangle after telling a TV interviewer that his family had “a whole range of breads” at home, when asked how much he would spend on a loaf.
Prime minister Boris Johnson appeared to admit that Wednesday’s statement had failed to match the challenge facing Britons in what the Office for Budget Responsibility said will be the worst year for living standards since records began in 1956.
The PM said that the outlook for British families “will continue to be tough, it will continue to be choppy”, but promised the government would “look after people” through the cost of living crisis. And added: “We need to do more.”
Mr Sunak’s £330 cut in national insurance contributions (NICs), achieved by raising the threshold for the tax to £12,570, was welcomed by Tory MPs.
But several said he should have gone further to help the poorest in society – many of whom do not earn enough to pay NICs and will not benefit from the 5p cut in fuel duties as they do not drive.
Waveney MP Peter Aldous – who rebelled against Mr Sunak’s decision to slash £20 a week from universal credit as Covid support wound down – said the chancellor’s package offered “negligible” help for the most vulnerable, whose livelihoods will be “imperilled by the declining real value of welfare benefits”.
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Former work and pensions secretary Stephen Crabb also said Mr Sunak cannot wait until his autumn Budget to provide more help for the poorest.
“There is certainly more to do when it comes to supporting those on the very lowest incomes,” said Mr Crabb. “I don’t think waiting until the autumn budget for further action is sustainable.”
Meanwhile, South Dorset MP Richard Drax said that the chancellor’s “tinkering” did not go far enough, warning that the 1p cut in the basic rate of income tax promised in 2024 would “come too late” for deprived areas of his constituency.
Treasury minister Simon Clarke told the House of Commons that benefit claimants will have to wait until next year to see payments catch up with spiralling inflation.
April’s 3.1 per cent upgrade was calculated on the basis of inflation rates last September, which were well below the current 5.5 per cent or the 8.7 per cent peak they are expected to reach later this year. Mr Clarke told MPs that if inflation remains high in September, that will be reflected in the uprating coming into effect in April 2023.
Resolution Foundation chief executive Torsten Bell said that poverty will rise more sharply this year than at any time outside a recession, with about 1.3 million Britons expected to be pushed into absolute poverty by the cost-of-living squeeze and the tax hikes due in April.
The typical working family is set to lose 4 per cent of their income – an average of £1,100 – over the financial year, while the poorest quarter of households will see 6 per cent of their earnings wiped out by rising costs and taxes.
“The decision not to target support at those hardest hit by rising prices will leave low- and middle-income households painfully exposed,” said Mr Bell.
The foundation’s projections suggest that the 2019-24 parliament will be the worst on record for plummeting living standards, with household incomes set to fall by 2 per cent up to 2025 – double the decline seen during the financial crisis.
In the face of such a crisis, Mr Sunak’s policies “do not measure up to the rhetoric”, Mr Bell said.
The director of the respected Institute for Fiscal Studies think tank, Paul Johnson, said that Mr Sunak’s £6bn cut in NICs, coupled with an earlier £9bn package of help with energy bills, “is not enough to offset the fall in real earnings that we expect to see”.
An average earner on £27,500 a year will be about £360 worse off in the next financial year, while someone earning around £40,000 will be almost £800 worse off, he said.
Meanwhile, the failure to upgrade departmental spending in areas like health and education to reflect the expected surge in inflation to almost 9 per cent later this year will effectively mean “hefty real pay cuts across the public sector”.
The IFS chief said that tax cuts announced by the chancellor on Wednesday were more than wiped out by the “magic” of fiscal drag, as the four-year freeze on income tax thresholds he announced last year pulls millions of workers into higher rates of taxation.
Spiralling inflation means that the freeze – which was expected to deliver a relatively modest increase in tax receipts when first announced at a time of slowly rising prices – will deliver extra revenues of twice the value of the £5bn cut in the basic rate.
Predicting a rise in the overall tax take to levels last seen in the late 1940s, the IFS’s Mr Johnson said: “Mr Sunak’s statement contained big new tax cuts. But it also allowed taxes to rise. He can now expect to raise more in tax as a share of national income by 2025 than he expected last October.
“In fact, taxes are set to rise to their highest level as a fraction of national income since Clement Attlee was prime minister.”
Mr Sunak also came under fire from a former head of the navy for failing to increase defence spending at a time of global tension over Russia.
Lord West of Spithead told the House of Lords: “We are closer to a world war than at any stage during the last 60 years.
“With that backdrop, which is terrifying and horrifying, I was appalled that in the spring statement there was no mention of extra money for defence.”
Mr Sunak defended his measures, but admitted he could not shelter everyone from the stormy financial weather ahead, with domestic energy bills due to jump by £600 in April and a similar sum in October.
“I wish I could make sure that we protect everyone against all aspects of that, but it’s impossible for anyone in my job to do that,” said the chancellor.
“What we can do is make a difference where we can.”