This is not where British Chancellor Rishi Sunak would like to be. This year was intended to be the start of the post-pandemic period of his chancellorship. After spending huge amounts on coronavirus support programs and then winning the internal party arguments for higher funding, catching up, spending on public services through taxes rather than borrowing, he could now be the real small, low-tax conservative who he is real . However, the spring statement he will make on Wednesday will likely see him once again dole out fiscal generosity. Whatever his qualms about government spending are, that’s the right thing to do.

Sunak will have room to spend in the credit forecasts while still meeting its fiscal targets. While the Office for Budget Responsibility, the UK’s tax watchdog, is likely to lower its growth forecasts – thanks to the effects of higher oil prices on consumer purchasing power – the rise in inflation has also boosted tax revenues. Even before the latest rise in commodity prices, receipts this year have already been better than expected as the economy has recovered quickly from the coronavirus pandemic.

However, only the outlook for loans has improved. Inflation is rising and growth is slowing. Like much of the rest of the rich world, Britain faces the prospect of stagflation and severe pressure on living standards. Planned tax increases to fund post-pandemic services will further reduce household purchasing power. The Bank of England is also ahead of other major central banks in raising interest rates.

Earlier this year, before the Russian invasion of Ukraine, Sunak announced a loan scheme to support those struggling with higher energy bills. Managed through the municipal tax brackets, a system of local government taxation based on home values ​​and often not updated since the early 1990s, it could have been better targeted at the most vulnerable. Nevertheless, the easiest and fastest way to help is to push forward a planned increase in the universal credit benefit for the low-paid so that it aligns with forecasted inflation now rather than later in the year.

Sunak’s experience during the pandemic has made him uncomfortable with “temporary” giveaways, as he thinks they’ll be hard to relax once times get back to normal. Accelerating an already planned increase in the benefit should therefore appeal to him. It will not increase the amount recipients of universal credits receive in the long run. The chancellor should also consider changing the loan arrangement to a simpler discount. As bad as he thought the cost of living crisis was when he launched the plan, it has gotten dramatically worse.

The same logic regarding the difficulty of abolishing temporary measures should apply to any plan to scrap or lower fuel taxes. It would be politically popular, but a mistake. The rising energy price is a useful market signal to save on a scarce resource and invest in fuel efficiency. The job of government policy should be to facilitate the transition rather than water down the message that the country needs to reduce its dependence on fossil fuels.

Sunak is right that in the longer term any extra room in the UK’s tax plans should be devoted to boosting productivity growth – that is the best guarantee for a more permanent improvement in living standards. Extending the investment deduction, which can be reclaimed from corporate income tax, would be a good first step. However, the chancellor will have to wait a while to clarify the rest of his tax cut plans for Britain.


This post How to ease Britain’s cost of living crisis? was original published at “https://www.ft.com/content/1facd75f-deb6-45d1-a225-312fd96ff9e6”

LEAVE A REPLY

Please enter your comment!
Please enter your name here