Sunak gambles with election-year tax cut as poor face living squeeze

UK Finance Minister Rishi Sunak placed a long-term bet on the 2024 General Election by pledging a cut in income taxes, while trying to ease the immediate financial pain of Britons with a reduction in fuel duty and threshold rise for National Insurance contributions.

Delivering his Spring statement on the day when inflation soared to 6.2% on top of surging energy costs and impact of the Ukraine war, the millionaire Sunak said the basic rate of income tax would be cut to 19p from 20p in 2024, the year an election is due.

He also cut fuel duty by 5p a litre to combat runaway pump prices as the cost of crude oil sits well above $100 a barrel on fears of supply disruption and a possible embargo on Ukraine’s invader, Russia. Value added tax on energy efficiency such as solar panels, heat pumps and wind turbines was cut to zero from 5%.

Sunak said that from July the rate at which people start paying national insurance would be £12,570 – in line with the personal income tax allowance. However, economists said this measure would do nothing for vulnerable people on lower wages or those on means-tested benefits.

Britons are now labouring under the highest tax burden since the second world war, despite Sunak's oft-repeated claims that he is a tax cutter by nature. He broke an election promise last year to lift national insurance contributions from next month while also cutting a much-needed uplift to the Universal Credit benefit.

Paul Johnson, director of the highly-respected Institute for Fiscal Studies thinktank, was also scathing at the tax cut announcement when people faced an increase in NI contributions

“Oh for goodness sake. What is the possible justification for cutting income tax rate while raising NI rate? (It) Drives (a) further wedge between taxation of unearned income and earned income. Yet again benefits pensioners and those living off rents at expense of workers,” he wrote on social media.

Torsten Bell, chief executive of the Resolution Foundation thinktank called Sunak’s package “badly designed” and said the finance minister had spent his fiscal headroom “on burnishing his credentials as a tax cutter NOT on prioritising help for low and middle income households”.

Bell also pointed out that £2 out of every £3 in new assistance proffered by Sunak would go to people in the top half of the income distribution pile.

He added that it was also “totally bonkers” to be raising national insurance on earners while cutting income tax which benefits people with other income sources such as pensions or property rents.

Sunak was also forced to admit that the Russian invasion of Ukraine would lead to slower than expected growth and higher inflation this year than previously forecast.

The independent Office for Budget Responsibility revised its growth forecast for 2022 down to 3.8% compared with the 6% outlined at Sunak’s budget last October. Inflation is predicted to hit a 40-year peak of 8.7% in the final three months of 2022.

The OBR also warned households would still see a dramatic fall in their living standards this year, despite measures announced on Wednesday.

“With inflation outpacing growth in nominal earnings and net taxes due to rise in April, real livings standards are set to fall by 2.2% in 2022-23 – their largest financial year fall on record – and not recover their pre-pandemic level until 2024-25,” it said.