Sunak confronts cost of living crisis with inflation-fighting budget

Chancellor Rishi Sunak on Wednesday launched plans to ease a cost of living crisis, with UK inflation set to spike to a 40-year high on Ukraine fallout.

Delivering the Spring Statement, Sunak unveiled measures to help household finances, including a cut on fuel duty and easing the tax burden for the lowest earners.

Britain’s economy will grow far slower than expected this year owing to the Ukraine war and soaring global inflation, he told parliament.

The UK economy was set to grow 3.8 percent in 2022, down from an official estimate of six percent made in October.

Sunak said that the Office for Budget Responsibility (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.

Gross domestic product was estimated to expand a further 1.8 percent next year, down from an official prediction of 2.1 percent.

The OBR warned that should “wholesale energy prices remain as high as markets expect, energy bills are set to rise… pushing inflation to a 40-year high of 8.7 percent in the fourth quarter”.

UK annual inflation accelerated to a 30-year high at 6.2 percent in February, official data showed Wednesday.

In the budget update, Sunak announced that National Insurance starting thresholds will rise to £12,570 from July. The cut, worth over £6 billion, will benefit almost 30 million working people with a typical employee saving over £330 in the year from July.

Sunak also announced that fuel duty for petrol and diesel will be cut by 5p per litre from 6pm tonight (23 March) – a tax cut worth £2.4 billion. This is the biggest cut ever on all fuel duty rates and means a one-car family will now save on average £100.

The basic rate of income tax will also be cut by 1p in the pound in 2024, when the OBR expect inflation to be back under control, debt falling sustainably and the economy growing. The cut is worth £5 billion and will be the first cut to the basic rate in 16 years.

The Chancellor also set out a series of measures to help businesses boost investment, innovation, and growth – including a £1,000 increase to Employment Allowance to benefit around half a million smaller firms.

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.

“Cutting taxes means people have immediate help with the rising cost of living, businesses have better conditions to invest and grow tomorrow, and people keep more of what they earn for years to come.”

Sunak also announced that there will be an extra £500 million for the Household Support Fund, which doubles its total amount to £1 billion to support the most vulnerable families with their essentials over the coming months.

The Chancellor also reduced the VAT on energy saving materials such as solar panels, heating pumps and roof insulation from 5% to zero for five years.

This cost of living support comes on top of the measures that the Chancellor has already announced over the recent months.

Sunak last month unveiled a package worth £9 billion targeted at helping 28 million poorer and middle-income households with energy bills in particular.

Household incomes are set to shrink further in April owing to a planned tax hike on all UK workers and businesses to fund care for the elderly.

The same month, a cap on domestic gas and electricity bills will be increased, in line with rebounding wholesale energy costs.

“Higher inflation will erode real incomes and consumption,” the OBR said Wednesday.

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.