FILE PHOTO: British Chancellor of the Exchequer Rishi Sunak speaks at Conservative Party Spring Conference in Blackpool, Britain March 18, 2022. REUTERS/Phil Noble
March 23, 2022
By David Milliken, William Schomberg and Andy Bruce
LONDON (Reuters) -British finance minister Rishi Sunak cut fuel duty and softened some of a looming payroll tax increase on Wednesday as he sought to alleviate a severe cost-of-living squeeze against the backdrop of slowing economic growth.
But with inflation set to hit a 40-year high of nearly 9% later this year, government forecasters said Britons faced the biggest hit to their living standards since records began in the late 1950s – even after Sunak’s measures.
In a half-yearly budget update overshadowed by the conflict in Ukraine, Sunak set out plans to inject about 17.6 billion pounds ($23.2 billion) into the economy in the coming financial year.
“The invasion of Ukraine presents a risk to our recovery – as it does to countries around the world,” Sunak told parliament.
New forecasts from the Office for Budget Responsibility (OBR) predict economic growth of 3.8% this year, much less than the 6.0% it had projected in October.
But many of the factors behind the squeeze on living standards were in place before Russia invaded its neighbour on Feb. 24 in what Moscow calls a “special military operation” to disarm Ukraine but which Kyiv and the West say is an unprovoked war of aggression.
Data published earlier on Wednesday showed inflation had already hit a 30-year high of 6.2% in February before the war began to push energy and some food prices even higher.
A sharp rise in social security contributions – originally designed to raise around 12 billion pounds a year – remains scheduled for April as Sunak seeks to fund more spending on health and social care after the COVID-19 pandemic.
But in an attempt to reduce that hit, he said he would increase the threshold at which workers start to pay the contributions by 2,700 pounds from July, bringing it into line with the income tax system.
“That’s a 6 billion pound personal tax cut for 30 million people across the United Kingdom,” Sunak said, adding it would save workers more than 330 pounds a year each and was the largest single personal tax cut in a decade.
Fuel duty will be cut by 5 pence a litre for the next 12 months at a one-off cost of 2.4 billion pounds, and the main rate of income tax will fall to 19% from 20% in 2024, when Britain is due to hold its next national election. This will reduce revenue by 6 billion pounds a year.
Sunak also launched a review of business taxation, with cuts planned at his next budget in the autumn.
Other European governments have responded to the latest surge in energy prices too. France, Italy, Spain and Sweden have moved to subsidise vehicle fuel costs. Germany is considering similar plans.
LITTLE HELP FOR POOREST BRITONS
The OBR, which produces the forecasts that underpin the government’s planning, said Sunak was undoing only one sixth of the tax rises he had previously announced.
Sunak’s measures also provide little help to Britons who are not in work and cannot afford a car, with just 500 million pounds added to a hardship fund administered by municipal authorities.
“This package does next to nothing for those getting hardest-hit by rising prices – those who are disabled and not working just got told they are on their own,” said Torsten Bell, director of the Resolution Foundation think tank.
Only a third of the support announced on Wednesday would go to the poorest half of Britons, the think tank added.
The opposition Labour Party had called for the government to scrap entirely the planned national insurance rise.
“Today was the day that the chancellor could have put a windfall tax on oil and gas producers to provide real help for families. But he didn’t,” Labour finance spokesperson Rachel Reeves said.
The OBR’s new budget forecasts show Britain on course to borrow 29 billion pounds less over the next four years than it expected in October, despite a much weaker growth outlook.
Borrowing for the current financial year, which ends on March 31, is due to come in at 128 billion pounds, 55 billion pounds less than forecast before, largely because tax revenues have been higher than the OBR had anticipated.
British government bond prices rallied on the prospect of lower future debt issuance.
The forecasts showed inflation, as measured by the consumer price index, averaging 7.4% in 2022, up from October’s forecast of 4.0%.
This will push up the cost of servicing government debt, around a quarter of which is inflation-linked, to 83 billion pounds in the coming financial year, a 25-year high as a share of tax revenues, before falling back to historically low levels.
The OBR said gross domestic product would grow by 1.8%, 2.1% and 1.8% in 2023, 2024 and 2025. In October, it forecast growth of 2.1%, 1.3% and 1.6% over the same three years.
($1 = 0.7579 pounds)
(Writing by William Schomberg; Editing by Catherine Evans)