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Tuesday, May 24, 2022

Britain is headed for worst drop in living standards since the 1950s as 1.3m people face ‘absolute poverty’

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Britain is headed for its biggest drop in living standards since the 1950s this year, despite a mini-budget in which Chancellor Rishi Sunak slashed £330 from national insurance for the average worker and slashed 5 pence from tax on a liter of gasoline.

The chancellor also promised a 1-cent cut in the basic income tax rate in 2024, in what was immediately denounced as a pre-election bribe.

But it did nothing for the poorest, who see social benefits far above inflation, which is expected to peak near 9 percent this year.

And he rejected opposition calls for a windfall tax on windfall profits from North Sea oil and gas companies to pay for a VAT cut on energy prices.

The morning after the declaration, the economic think tank the Resolution Foundation warned that around 1.3 million Britons will be pushed into absolute poverty by falling costs of living.

A zero VAT qualifying offer for green home improvements, including the installation of solar panels and heat pumps, fell short of the immediate help sought by households facing an average £600 increase in domestic gas and electricity bills in eight days and a new trek of similar magnitude in the fall.

Martin Lewis, who runs the Money Saving Expert website, said his head “sunk in” when he heard the chancellor’s “limited” measure on energy, adding: “It will not affect most households who will see an average increase likely of £1,300 in bills year-on-year for October.”

The government’s official forecaster, the Office for Budget Responsibility, said the impact of rising prices will mean households’ real disposable income per person will fall 2.2 percent in 2022-23, “the biggest drop in a year.” single fiscal year since ONS records began in 1956-57.”

The OBR said the changes announced in Sunak’s spring statement, heralded by the Treasury as the biggest tax cuts in a quarter-century, did no more than remove a sixth of the tax increases it had previously announced since he became chancellor in 2020.

Even after the £6bn cut in National Insurance Contributions (NICs) came into force in July and the £5bn cut in income tax in 2024, the OBR said Total taxes will rise from 33% of GDP in 2019-20 to 36.3% in 2026-27 – its highest level since the 1940s.

The respected think tank the Institute for Fiscal Studies said the full impact of the changes Sunak introduced will see nearly all workers pay more tax on their earnings by 2025.

Sunak was “giving with one hand on taxes, having previously taken with the other”, the IFS said, as unexpectedly high inflation saw its earlier freeze on income tax thresholds become a massive revenue generator, dragging down many more workers to higher rates and more to pay for spring return giveaways.

The chancellor gained leeway thanks to a £15bn windfall from additional tax revenue, as well as £5bn from increased student loan repayments, giving him the flexibility to advertise with anticipate a cut in the basic income tax rate without violating its rules on debt and indebtedness. The new basic rate of 19 pence will be the lowest since the First World War.

But the OBR warned that uncertainties resulting from the Ukraine war and volatility in energy prices meant its calculations “could be overturned by relatively small changes in the economic outlook”.

Sunak leaves Downing Street for spring statement (PA)

And Sunak himself warned parliamentarians: “We should be prepared for the economy and public finances to worsen, potentially significantly.”

IFS Director Paul Johnson said Mr Sunak’s changes will make the tax system “less equitable and less efficient”, widening the gap between highly taxed earnings from work and lower taxes on pensions. and non-labor income.

And he said the chancellor left cash settlements for public services unchanged, meaning the real-term value increases announced in the autumn budget for everything from the NHS to schools will be reduced by around 10 percent.

But most importantly, he said the chancellor “had done nothing more for those dependent on benefits, the poorest, apart from a small amount of extra money for local authorities to dispose of at their discretion.”

Johnson warned: “Your benefits will increase just 3.1 percent for the next fiscal year. Your cost of living could well increase by 10 percent.”

Trussell Trust chief executive Emma Revie said the decision would mean “many more people will have no choice but to use a food bank”, while the housing charity Crisis said many people would be “pushed into the homelessness” for their inability to pay the bills.

With wages expected to lag behind skyrocketing inflation in many cases, the IFS estimated that average wages will reach £31,400 at current prices in 2027, some £11,000 less than they would have been. if the trends prior to the financial collapse of 2008 had continued.

Labor Treasury spokesman Pat McFadden said Sunak had “left homes and businesses to fend for themselves in the midst of a devastating cost-of-living crisis.”

McFadden said: “Rishi Sunak is raising taxes over and over again, just to offer crumbs just before the election. This is a cynical chancellor who is asking struggling families to pay for the Conservative election campaign. The British people will notice.”

In a hastily rewritten statement to the House of Commons after the Ukraine war derailed his plans, the chancellor acknowledged that the UK’s decision to impose sanctions on Vladimir Putin will not be “gratuitous” for the British.

But he said: “This declaration puts billions back into the pockets of people across the UK and offers the biggest net personal tax cut in over a quarter century.

“Lowering taxes means people have immediate help with rising costs of living, businesses are better able to invest and grow tomorrow, and people keep more of what they earn for years to come.”

The Treasury said the increase in the NIC threshold for employees will fully compensate 70 percent of workers for the money they stand to lose from the introduction of Mr. Sunak in April, without reducing the 12,000 million pounds sterling. additional funding for the health and care system that was planned to be raised each year.

Meanwhile, the 5p cut in fuel taxes will save an average car family around £100 a year, at a cost of £2.4bn. But the savings will end in March of next year, when tariffs rise 6 pence in one jump.

The chancellor also doubled to £1bn a household support fund for councils to provide discretionary grants to residents in financial difficulty.

Liberal Democrat leader Sir Ed Davey said OBR figures showed the combined impact of Mr Sunak’s actions as chancellor will mean Britons will pay a total of £43.8bn more in taxes in 2024-25. .

“Rishi Sunak is trying to rip off the British public by hiding the true cost of his shameful tax increases,” said Davey. “He has insulted millions of squeezed families across the country by thinking he can hide this in the fine print.”

Using a forecast of future energy prices, the first since the Russian invasion of Ukraine, the OBR now expects the peak price on energy bills to rise by a further £830 in October.

This and other factors mean the cash households have after paying for essentials will drop by 2.2 percent, the OBR said, the biggest drop in living standards in a single fiscal year since records began in 1956.

For now, cutting the fuel tax, reimbursing the energy bill and raising the threshold for NICs so that earners keep an extra £3,000 before paying tax will only offset half the cost. of rising energy bills.

Meanwhile, by raising the threshold by £3,000, the chancellor raised questions about how enough funding will be generated to tackle chronic NHS retardation and address the social care needs of an aging population.

the independent he understands that the £12bn a year the tax was intended to raise will be capped by the Treasury until 2024-25, the end of the spending review period. It is not yet clear what will happen after that time.

But there are also other non-energy inflationary pressures on consumers, including food, goods and services. These account for more than half of total inflation. This means government efforts will only make up a third of this overall drop in living standards, the watchdog said.

The economic shock is so severe that inflation will reduce consumers’ appetite to buy goods and services, which will reduce economic output.

“Higher inflation will erode real incomes and consumption, reducing GDP growth this year,” it said.

It cut its forecast for 2022 economic output from 6 percent in last year’s budget to 3.8 percent. The pattern also continues next year, with expectations falling from 2.1% to 1.8% growth in 2023, as “cost of living contraction continues, some fiscal support is withdrawn and monetary policy tightens.” even more,” he said. .

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