Rishi Sunak’s intervention unlikely to have much impact on cost of living

Ahead of his Spring Statement on Wednesday, British chancellor of the exchequer Rishi Sunak faced the challenge of responding to the soaring cost of living in a way that allowed him to claim that he is a tax-cutting chancellor. His response was to cut fuel duty, abolish VAT on home insulation, raise the threshold for paying National Insurance Contributions (NICs) and promise a 1p income tax cut by 2024.

Better than expected tax revenues gave him the headroom for cutting taxes without breaching his own fiscal rules. And his statement pleased a key audience: Conservative MPs who will decide if he should succeed Boris Johnson as prime minister.

Impact

But they are unlikely to have a significant impact on the cost of living crisis that is looming for millions of people in Britain and the chancellor is pressing ahead with an increase in NICs from next month.

With inflation forecast to peak at almost 9 per cent later this year, living standards are heading for their biggest fall since the mid-1950s, leaving the poorest struggling to pay for the soaring cost of essentials like food, heating, rent and transport. There will be no increase in social welfare benefits and the state pension will rise by just over 3 per cent, far below the rate of inflation.

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Public services will receive no extra money but inflation will push their costs up, forcing them to curtail the services they offer and public service workers will also experience a real terms pay cut. Noting that the cost of servicing Britain’s national debt will be £83 billion (€99.6 billion) this year, four times higher than last year, he warned that more borrowing was not “cost or risk free”.

Rate

Sunak’s promise to cut the basic rate of income tax from 20p to 19p by 2024, the first such cut for 20 years, made clear how the Conservatives are planning to present themselves at the next general election. But the economic growth forecast has been cut from 6 per cent to 3.8 this year and it is set to fall to 1.8 per cent next year and to be about or below 2 per cent every year after that until 2026.

Last October, Johnson told the Conservative party conference that Britain was entering a new era of high wages and high productivity. But Sunak's statement points to a bleaker vista of low growth, low productivity and wages lagging far behind soaring prices.