Rishi Sunak’s spring statement is a strategy for inequality. The war in Ukraine and post-pandemic disorder have sent fuel and food prices soaring. The rise in inflation to a 40-year high is expected to reduce real household disposable incomes by 2.2% in 2022 – the biggest fall in living standards since records began in 1956. Energy bills could top £3,000 a year. Without help, warm homes and warm meals might become the preserve of the top half of British society.
Yet the IPPR thinktank says that the poorest get just £120 help to offset rising costs in the spring statement, while the richest are given a £480 boost. The money was available to hand out. Economic growth meant the chancellor had almost £20bn of fiscal headroom within his self-imposed rules. By not uprating benefits or the state pension, which are only going up by 3.1% this month when inflation will be about 8%, Mr Sunak has delivered a big cut in living standards for the poor.
As government department budgets are set in cash terms, higher inflation will mean either public servants like teachers taking large real pay cuts – politically difficult if private sector wages are rising more quickly – or cutting back on the services they provide. Mr Sunak should have at least reinstated the universal credit uplift of £20 a week and committed more cash for free school meals, rather than spend £10bn reducing government borrowing.
Mr Sunak spent the other £10bn from his windfall on tax cuts – stung by Labour taunts over his “high tax policy”. The chancellor’s spring statement undid about a sixth of the overall net tax rises he has announced. Set against his own arguments, Mr Sunak’s national insurance cut makes no sense. For six months the chancellor insisted that he needed to raise £12bn to clear post-Covid NHS waiting lists via the national insurance paid by employees and employers. However, on Wednesday afternoon it appeared that Mr Sunak only needed £6bn for the health service, and he raised the threshold from which workers pay national insurance.
This “tax cut” is skewed towards the wealthy – with only £1 in every £3 gained going to the bottom half of society. Finally, to make a mockery of the idea that taxation is needed to pay for essential public services, Mr Sunak proposed reducing the basic rate of income tax from 20% to 19% from April 2024. The two changes wipe out the amount supposedly required to pay for health and social care.
The chancellor’s reduction in petrol and diesel taxes by 5p a litre is free money to motorists in proportion to how much they drive and how fuel-inefficient their car is. It is also a highly unequal measure. A tax-cutting Conservative chancellor is unlikely to raise fuel duty, which has been frozen in real terms since 2010, ahead of an election. It would have been better to instead spend the £2.5bn cost of the policy on funding free or cheap public transport.
Reducing government borrowing while letting the poor go cold and hungry is not good politics or good economics. Benefits are heading to their lowest level in real terms since 1985. Growth is set to fall. Rising inactivity rates mean that unemployment is closer to 6% than the official 3.9%. The standard of living will drop. Mr Sunak will never be able to cut government expenditure fast enough or raise taxes high enough to keep pace with the budgetary deficit due to the fall in economic output. The government’s policy will only lead to a progressive deterioration of the wellbeing of its citizens. The sooner Mr Sunak realises that he is out of touch with the public mood and reverses his economic policy, the better for the country.