Rishi Sunak is expected to ease a “terrifying” cost-of-living squeeze on UK households next week, while banking some of an estimated £25bn public finances windfall until the country’s economic outlook becomes clearer.
The chancellor told Tory activists on Friday that his priority was to start cutting taxes, saying that he wanted to “make a difference where we can” to help people through the household budget squeeze.
Tory MPs expect Sunak to use his Spring Statement on Wednesday to cut fuel duty, while Treasury officials have also considered in recent weeks broader tax cuts to mitigate a looming cost-of-living crisis.
“People are absolutely terrified. They are facing a triple whammy of higher petrol and diesel prices, higher energy bills and higher household bills,” said Robert Halfon, Tory chair of the Commons education committee.
“Helping people must be the highest priority for the chancellor next week. People are struggling to keep their heads above water. We are talking red alert.”
Halfon was one of more than 50 Tory MPs to write an open letter to Sunak calling for a cut in fuel duty or VAT to ease prices at the pumps.
Conservative MPs believe that Boris Johnson, who is seen in the Treasury as an enthusiast for “giveaways”, will ensure this cut happens even if the chancellor believes the recent sharp fall in crude oil prices on world markets will have more of an effect than any fuel duty cuts.
Johnson and Sunak agreed the main points of the Spring Statement more than a week ago, but their relationship has been strained in recent months. The prime minister’s allies believe that the chancellor was less than supportive during the recent partygate scandal.
Meanwhile, Sunak this week insisted that Johnson delay publication of an energy security strategy to give him more time to assess the costs of plans to develop nuclear and green power.
The chancellor’s allies insist that the Spring Statement is not a “mini Budget” and that it will be “policy light”, but the chancellor is under intense political pressure to offer help to households.
Disposable incomes are expected to be squeezed more heavily than at any time in 30 years, with inflation rising above 8 per cent this spring, according to the Bank of England, and energy bills set to rise to an annual average of £3,000 from October.
Speaking at the spring Conservative conference in Blackpool, Sunak reassured activists that he had raised taxes enough to stabilise the public finances and that “my priority going forward is to cut taxes”.
Those involved in preparing the Spring Statement say that consideration has been given in recent weeks to changes to income tax and national insurance allowances and thresholds.
The Treasury declined to comment but Sunak has told colleagues that he wants to defer big fiscal decisions until later in the year, when the economic picture, including the situation in Ukraine, may be clearer.
While the energy crisis is being felt at the petrol pumps now, Sunak argues that households are protected from a further increase in domestic energy bills until a new price cap, which could hit £3,000, is set in October.
But analysts believe that Sunak has more “wriggle room” to offer help to households if he chooses to act next week, rather than waiting for his main Budget in the autumn.
Stronger employment growth and higher wage and price inflation have boosted tax revenues far in excess of the October forecasts from Sunak’s fiscal watchdog, leaving public borrowing on course to be about £25bn lower than expected in 2021-22.
The effects of Russia’s invasion of Ukraine will result in the Office for Budget Responsibility forecasting a serious squeeze in household incomes, lowering the forecasts for real growth, but higher inflation will improve the outlook for public finances significantly, especially as it is not expected to result in much higher interest rates, increasing the cost of servicing the government debt.
With higher inflation, income taxes and value added tax receipts rise faster than expected. The Institute for Fiscal Studies has calculated that with the chancellor freezing all income tax allowances and thresholds until 2025-26, higher inflation will turn what was expected to be a £8bn a year tax increase into a £20bn a year rise.
George Buckley, chief European economist at Nomura, said the “better deficit out-turns [this year] give the chancellor some wriggle room” to address the cost-of-living crisis facing households.