Rishi Sunak offered help through the tax system for millions of workers as the cost-of-living crisis and war in Ukraine hit the economy.
The Chancellor shielded lower earners from the impact of the forthcoming national insurance hike, cut 5p off fuel duty from Wednesday evening and promised to cut income tax by 1p in 2024.
But he acknowledged the impact of inflation, which is at a 30-year high, and the global economic uncertainty caused by Vladimir Putin’s invasion of Ukraine.
The Office for Budget Responsibility (OBR) downgraded growth in gross domestic product – a measure of the size of the economy – from the 6% forecast for this year at the time of the Budget in October to just 3.8%.
Next year’s growth forecast has been downgraded from 2.1% to 1.8%.
Inflation hit 6.2% in February, up from 5.5% in January, again reaching its highest level since March 1992, when it stood at 7.1%.
Mr Sunak said inflation was forecast to average 7.4% this year due to “disruptions to global supply chains and energy markets, combined with the economic response to Putin’s aggression”.
He said the UK’s actions against Mr Putin’s regime were “not cost-free for us at home” and presented a “risk” to the recovery.
Mr Sunak said “it is too early to know the full impact of Ukraine’s war on the UK economy” but the OBR acknowledged there was “unusually high uncertainty” around the economic outlook.
The cost-of-living crisis driven by rising fuel and energy prices was set to be exacerbated in April by the 1.25 percentage point hike in national insurance to fund the NHS and social care.
But Mr Sunak unveiled a £ 6 billion plan to increase the threshold at which people start paying national insurance contributions (NICs) by £ 3,000 to £ 12,570 from July.
Mr Sunak said it was “a £ 6 billion personal tax cut for 30 million people across the United Kingdom, a tax cut for employees worth over £ 330 a year”.
Mr Sunak said around 70% of workers would have their tax cut by more than the increase coming in April.
And he promised further support in 2024 with a pledge to cut the basic rate of income tax from 20p in the pound to 19 – “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 cutting income tax rate while raising NI rate?
“Drives further wedge between taxation of unearned income and earned income. Yet again benefits pensioners and those living off rents at the expense of workers. ”
Despite the measures announced by the Chancellor, the overall burden of taxes is set to 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 levy and frozen income tax thresholds which will see more people dragged into paying higher rates of tax.
Other measures announced by Mr Sunak included:
– The employment allowance will increase from £ 4,000 to £ 5,000 allowing small businesses to reduce 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 business rates from April, saving firms £ 35 million in 2022-23.
Mr 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.
“Like our actions against Russia, I have been able to do this because of our strong economy and the difficult but responsible decisions I have had to make to rebuild our finances following the pandemic.”
Although the nation’s balance sheet has recovered faster from the pandemic than the OBR had expected, Mr Sunak told MPs “we should be prepared for the economy and public finances to worsen – potentially significantly” as a result of the war.
Warning against increased borrowing, Mr Sunak pointed out that a record £ 83 billion on debt interest alone was forecast to be spent in the next financial year.
Mr Sunak insisted the Treasury will continue to meet all 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.
Borrowing as a percentage of GDP is 5.4% this financial year, against the OBR’s previous prediction of 7.9%, but borrowing next year will be worse than expected at 3.9% against the 3.3% expected in October.
The squeeze on living standards was underlined by the OBR in its assessment of the economy.
With inflation outpacing the growth in earnings and the April tax hike, “real household disposable incomes per person fall by 2.2% in 2022-23, the largest fall in a single financial year since ONS records began in 1956-57”.
But it said the policy measures set out by Mr Sunak – including earlier help with energy bills – offset around a third of the overall fall in living standards that would otherwise have been seen.
Shadow Chancellor Rachel Reeves said Mr Sunak “has made the wrong choices”, and asked: “Where is the increased tax contribution for the very wealthiest in society?”