Spring Statement: Sunak banks public finances windfall for pre-election tax cut

Rishi Sunak has banked most of a £ 50bn windfall in the public finances to set up a war chest for pre-election tax cuts, leaving households facing a significant squeeze in living standards as runaway inflation bites.

The chancellor softened the blow with a £ 6bn national insurance cut for 30mn workers as the centrepiece of his Spring Statement. He also announced a one-year 5p cut in fuel duty, to take effect from 6pm, costing £ 2.4bn, in response to a clamor from Tory MPs that he should help motorists.

Sunak was under enormous pressure from Tory MPs and Labor to cut taxes aggressively and his response was criticized by Labor as being far too modest given the scale of pressures on households.

In an attempt to reassure Tory MPs that he is a “tax-cutting chancellor”, Sunak took the rare step of pre-announcing a 1 percentage point reduction in the 20p basic income tax rate in 2024, ahead of a general election, costing £ 5bn.

But the £ 6bn cut in national insurance will be wiped out by a £ 12bn NICs rise – the new health and social care levy – that will take effect next month.

Many Conservative MPs wanted Sunak to cancel the NICs rise completely, while Rachel Reeves, Labor’s shadow chancellor, accused the chancellor of “Alice in Wonderland” economics.

Sunak’s allies had admitted in advance that it would be “complicated” to explain to workers that he was both raising national insurance by £ 12bn and then cutting it by £ 6bn, by raising thresholds, at the same time.

Despite the giveaways in national insurance and fuel duty – and the prospect of a 1p income tax cut – the independent Office for Budget Responsibility concluded that Sunak was still engaged in a long-term increase in taxes.

“Net tax cuts announced in this Spring Statement offset around a sixth of the net tax rises introduced by this chancellor,” the OBR concluded.

That reflects the fact that Sunak is set to raise tens of billions of pounds from last year’s freeze in income tax thresholds, the NICs headline increase and a jump in corporation tax next year from 19 to 25 per cent.

Sunak’s statement was shrouded in gloomy news. He admitted that the sanctions taken against Russia over the invasion of Ukraine were “not cost free”. The OBR cut its growth forecasts.

With inflation and interest rates rising, Sunak said the rising cost of servicing Britain’s debt made it essential that he stuck to his fiscal rules of balancing day-to-day spending within three years with room to spare.

The chancellor said the OBR had warned that the economic outlook was highly uncertain and “we should be prepared for public finances to worsen, perhaps considerably”.

Given the tight fiscal constraints, Sunak’s reduction in fuel duty and tax cuts for domestic energy efficiency improvement were welcomed by Labor shouts of “Is that it?”. Sunak also announced £ 500mn for a hardship fund.

The chancellor immediately rallied Tory MPs by announcing that he would honor a 2019 Tory manifesto pledge to equalize the thresholds of national insurance and income tax at £ 12,575, at a cost of £ 6bn.

He said it would amount to a £ 330 tax cut for 30m people, calling it the “biggest single personal tax cut in a decade”. It will help people on lower pay and in effect halve the £ 12bn he expected to raise from his national insurance rise next month.

Many Tory MPs wanted Sunak to go much further, notably because he had been given a £ 50bn “windfall” from higher-than-expected growth and tax revenues in the current financial year.

Separately, the chancellor confirmed that his new “tax plan” would include proposals to try to boost Britain’s growth rate, which is forecast to typically run at about 1.8 per cent over the next five years.

There would be a shake-up of tax reliefs for investment and research, and a review of the levy apprenticeship, with details to follow in his autumn budget.

Small companies will see an increase in employment allowance from £ 4,000 per worker to £ 5,000, a measure that will benefit them by £ 435mn.

The chancellor has argued privately that he needs to hold back some fiscal firepower for later in the year, when he hopes there may be more clarity on the outlook in Ukraine and energy market volatility may have stabilized.

Sunak knows that in his autumn Budget he is likely to have to do far more to alleviate the cost of living pressures; the energy price cap for domestic bills could rise from almost £ 2,000 in April to about £ 3,000 in October.

The chancellor ignored Labor calls for a one-off tax on North Sea energy companies, arguing that he needs them to invest in offshore exploration and renewable schemes to bolster the UK’s energy self-sufficiency.

But that left him open to accusations that he was not pulling all the possible levers available to him to help struggling households now. Robert Halfon, one Tory MP, has warned of a “terrifying” cost of living crisis.

Labor said Sunak should have canceled the national insurance rise and introduced the windfall tax on energy companies. “It is clear the chancellor doesn’t get the scale of the challenge,” shadow chancellor Reeves said.

Source link

Leave a Reply

Your email address will not be published.