Rishi Sunak offered relief through the tax system for millions of workers as the cost-of-living crisis and war in Ukraine battered the economy.
The chancellor shielded people with lower incomes from the impact of the next national insurance increase, slashed 5 pence from fuel tax from Wednesday night and promised to cut income tax by 1 pence in 2024.
But he acknowledged the impact of inflation, which is at its highest point in 30 years, and global economic uncertainty caused by Vladimir Putin’s invasion of Ukraine.
The Office for Budget Responsibility (OBR) cut growth in gross domestic product, a measure of the size of the economy, from the 6% forecast for this year at Budget time in October to just 3.8% .
The growth forecast for next year has been lowered from 2.1% to 1.8%.
Inflation reached 6.2% in February, compared to 5.5% in January, again reaching the highest level since March 1992, when it stood at 7.1%.
Sunak said inflation was forecast to average 7.4% this year due to “disruptions in global supply chains and energy markets, combined with the economic response to Putin’s aggression.”
He said the UK’s actions against the Putin regime “are not gratuitous for us at home” and present a “risk” to the recovery.
Sunak said “it is too early to tell the full impact of the Ukraine war on the UK economy”, but the OBR acknowledged there was “unusually high uncertainty” around the economic outlook.
The cost of living crisis fueled by rising fuel and energy prices was exacerbated in April by a 1.25 percentage point increase in national insurance to fund the NHS and social care.
But Sunak unveiled a £6bn plan to raise the threshold at which people start paying National Insurance Contributions (NICs) by £3,000 to £12,570 from July.
Sunak said it was “a £6 billion personal tax cut for 30 million people across the UK, a tax cut for employees worth more than £330 a year”.
Sunak said about 70% of workers would get a tax cut higher than the increase that will come in April.
And he pledged more support in 2024 with a pledge to cut the base rate of income tax from 20 pence a pound to 19 pence, “a £5 billion tax cut for over 30 million people”.
But Paul Johnson, director of the Institute for Fiscal Studies think tank, said: “What is the possible justification for lowering the income tax rate and raising the NI rate?
“The gap between the taxation of non-labor income and labor income is further advancing. Once again it benefits retirees and those who live on income at the expense of workers”.
Despite the measures announced by the chancellor, the overall tax burden will 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 tax and frozen income tax thresholds that will see more people forced to pay higher tax rates.
Other measures announced by Sunak included:
– The employment allowance will increase from £4,000 to £5,000, allowing small businesses to lower 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 also be exempt from commercial fees from April, saving businesses £35m in 2022-23.
Sunak said: “This declaration puts billions back into the pockets of people across the UK and delivers the biggest net personal tax cut in over a quarter century.
“Much like our actions against Russia, I have been able to do this thanks to our strong economy and the difficult but responsible decisions I have had to make to rebuild our finances after the pandemic.”
Although the nation’s balance sheet recovered from the pandemic faster than OBR expected, Sunak told MPs that “we should be prepared for the economy and public finances to worsen, potentially significantly” as a result of the war. .
Cautioning against rising borrowing, Mr Sunak noted that a record £83bn is forecast to be spent on debt interest alone in the next financial year.
Sunak insisted that the Treasury will continue to abide by all of 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.
Leverage as a percentage of GDP is 5.4% this fiscal year, vs. OBR’s previous prediction of 7.9%, but next year’s borrowing will be worse than expected at 3.9% vs. 3 .3% expected in October.
The decline in living standards was highlighted by the OBR in its assessment of the economy.
With inflation outpacing earnings growth and April’s tax hike, “household real disposable income per person falls 2.2% in 2022-23, the biggest drop in a single fiscal year since the US began.” ONS records in 1956-57″.
But he said the policy measures put in place by Sunak, including earlier help with energy bills, offset about a third of the overall drop in living standards that would have otherwise been seen.
Shadow Chancellor Rachel Reeves said Sunak “has made the wrong decisions” and asked: “Where is the increased tax contribution for the wealthiest in society?”