Sunak offers tax cuts but living standards set for biggest fall in 66 years

The Chancellor shielded lower earners from the impact of the forthcoming national insurance hike, slashed 5p off fuel duty and promised to cut income tax by 1p in 2024.

But economic growth forecasts were downgraded and inflation is set to reach its highest level for 40 years, leading to household disposable incomes falling by 2.2% per person in 2022-23.

The Office for Budget Responsibility (OBR) downgraded growth in gross domestic product – a measure of the size of the economy – from the 6% forecast for this year at the time of the Budget in October to 3.8%.

Next year’s growth forecast has been downgraded from 2.1% to 1.8%.

Inflation is forecast to hit 8.7% in the fourth quarter of 2022 and to average 7.4% over the year, with wages failing to keep pace with rising prices.

The OBR said inflation – combined with rising taxes – will “weigh heavily on living standards in the coming 12 months”.

Despite a £6 billion cut in national insurance and a previously announced £9 billion package to help with energy bills, “real household disposable incomes per person fall by 2.2% in 2022-23”, the biggest hit in a single year since records began in 1956-57.

The cost-of-living crisis, driven by fuel and energy prices which were rising even before Vladimir Putin’s invasion of Ukraine, will be exacerbated in April by the 1.25 percentage point hike in national insurance to fund the NHS and social care.

But Mr Sunak unveiled a plan to increase the threshold at which people start paying national insurance contributions (NICs) by £3,000 to £12,570 from July, benefitting around 30 million workers with a tax cut worth more than £330.

It will mean 70% of workers will pay less national insurance than they otherwise would have, even after April’s tax hike.

He promised further support in 2024 with a pledge to cut the basic rate of income tax from 20p in the pound to 19p – “a £5 billion tax cut for over 30 million people”.

Mr Sunak said his tax plan “delivers the biggest net cut to personal taxes in over a quarter of a century”.

But the Chancellor acknowledged the war in Ukraine and sanctions on Russia are “not cost-free for us at home” and present a “risk” to the recovery.

Other measures announced by Mr Sunak included:

– The employment allowance will increase from £4,000 to £5,000, allowing small businesses to reduce their NICs.

– VAT on energy-saving materials such as solar panels, heat pumps and roof insulation will be reduced from 5% to zero for five years.

– Green technology will be exempt from business rates from April, saving firms £35 million in 2022-23.

Despite the measures announced by the Chancellor, the overall burden of taxes is set to reach the highest level since the late 1940s by 2026-27.

The OBR said taxes would reach 36.3% of GDP, mainly as a result of policies already announced, including the health and social care levy and frozen income tax thresholds which will see more people dragged into higher bands.

Mr Sunak 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.

“Like our actions against Russia, I have been able to do this because of our strong economy and the difficult but responsible decisions I have had to make to rebuild our finances following the pandemic.”

Although the nation’s balance sheet has recovered faster from the pandemic than the OBR had expected, Mr Sunak told MPs “we should be prepared for the economy and public finances to worsen – potentially significantly” as a result of the war.

Warning against increased borrowing, Mr Sunak pointed out that a record £83 billion on debt interest alone was forecast to be spent in the next financial year.

Mr Sunak insisted the Treasury will continue to meet all its fiscal rules, with the OBR expecting underlying debt to fall steadily from 83.5% of GDP in 2022-23 to 79.8% in 2026-27.

Borrowing as a percentage of GDP is 5.4% this financial year, against the OBR’s previous prediction of 7.9%, but borrowing next year will be worse than expected at 3.9% against the 3.3% forecast in October.

Paul Johnson, director of the Institute for Fiscal Studies, said Mr Sunak’s cuts to income tax and national insurance were “effectively paid for by increasing revenues as a result of fiscal drag” as wages increase, leading to a higher take for the exchequer.

He added that the Chancellor’s refusal to revise spending plans would mean less money in real terms for public services due to the impact of inflation, and there was little help for “the very poorest” in society who rely on benefits.

“Their benefits will rise by just 3.1% for the coming financial year. Their cost of living could well rise by 10%.”

Torsten Bell, chief executive of the Resolution Foundation living standards think tank, said: “The Chancellor announced a bigger package of measures than expected, but it was a badly designed one with almost no new support for the poorest households.

“Higher earners will be hardest hit by tax rises, but it makes no sense to raise national insurance while cutting income tax – 21st century Britain doesn’t need to do more to make things harder for workers, and easier for landlords.”

Pat McFadden, Labour’s shadow Treasury chief secretary, said Mr Sunak had “left households and businesses to fend for themselves in the middle of a devastating cost-of-living crisis”.

“The OBR has confirmed today the biggest hit to household incomes on record,” he said.

“Even after the changes today, under the Conservatives, Britain is facing the highest tax burden in 70 years, with the Chancellor confirming £24 billion of additional tax rises about to hit.”

Confederation of British Industry director-general Tony Danker welcomed the measures announced by Mr Sunak but warned they “don’t do enough to tackle the current challenges facing firms”.

“The Chancellor is right that the Government can’t solve every challenge,” he said.

“However, the only enduring response to inflation, energy prices and cost-of-living challenges is a relentless campaign for economic growth.”