LONDON: British finance minister Rishi Sunak cut fuel duty and softened some of a looming payroll tax increase yesterday 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 (RM98.2 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. Gross domestic product was estimated to expand a further 1.8% next year, down from an official prediction of 2.1%.
Sunak said that the OBR – the government’s official economic forecaster – “has not accounted for the full impacts of the war in Ukraine and we should be prepared for the economy and public finances to worsen, potentially significantly”.
“Their initial view, combined with high global inflation and continuing supply chain pressures means” the UK economy is forecast to grow significantly slower than thought.
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”.
A sharp rise in social security contributions – originally designed to raise around £12 billion 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 from July, bringing it into line with the income tax system.
“That’s a £6 billion personal tax cut for 30 million people across the United Kingdom,” Sunak said, adding it would save workers more than £330 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, 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 a year.
Sunak also launched a review of business taxation, with cuts planned at his next budget in the autumn.
While Sunak has been comforted by news that UK unemployment has fallen to pre-pandemic levels, rising wages are being eroded at the fastest pace in eight years as inflation soars.
“Higher inflation will erode real incomes and consumption,” the OBR said.
It said that “with inflation outpacing growth in nominal earnings and net taxes due to rise in April”, real living standards are set to fall by a record amount this year.
The main opposition Labour party attacked Sunak for failing to help all financially-struggling families.
“For all his words it is clear that the chancellor does not understand the scale of the challenge,“ Rachel Reeves, finance spokesperson for the main opposition Labour party, said in response to the budget update.
“He talks about providing security for hard-working families but his choices are making the cost of living crisis worse.”
Sunak's measures also provide little help to Britons who are not in work and cannot afford a car, with just £500 million 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 yesterday would go to the poorest half of Britons, the think tank added. – Reuters, AFP