Rishi Sunak has tough choices to make about how he will cope with a worsening cost of living crisis, with growing pressure from all sides to provide meaningful support to struggling families.
While household budgets are strained by sharp increases in fuel prices and energy bills, public finances have held up better than expected.
The Chancellor has £24billion more to spend than expected a few months ago, according to official figures released on the eve of Wednesday’s Spring Statement.
So what could he do to mitigate what is expected to be the biggest drop in living standards in 50 years?
Drop a National Insurance increase – £9billion
National insurance contributions are to be increased by 1.25 percentage points for employers and employees. Removing the rise would cost around £9billion and save the average worker around £255 a year compared to current plans. Companies facing rising costs also say it would help them limit price increases.
NI contributions for salaried employees are currently 12 pence per pound for earnings over £9,564 a year. This will increase by 1.25p from April 1, an increase of more than 10% in terms of cash. For people with different salaries, this is equivalent to:
£20,000 – additional £130 per year (£10.80 per month)
£30,000 – additional £255 per year (£21.25 per month)
£50,000 – additional £505 per year (£45.80 per month)
£80,000 – additional £880 per year (£73.33 per month)
So far, the Chancellor has strongly pushed back against persistent demands to drop the NI increase.
NI threshold change – £2.5bn
If the Chancellor wishes to avoid a reversal of his NI policy, he could increase the burden by increasing the threshold at which people start paying the threshold. Raising it from £9,900 to £10,700 would save workers £2.5billion in contributions.
Tax bracket freezes – £1.8bn
The thresholds at which people pay income tax are frozen from April 2022 to April 2026. This effectively means a tax increase for most people who work because the thresholds do not increase in line with the rise in the Cost of life.
The thresholds for inheritance tax and VAT have also been frozen. Raising the thresholds in line with inflation would mean around £1.8bn less revenue for the Treasury.
0% VAT on energy bills – £2.4bn
Labor backed the proposal to help people struggling with massive increases in energy bills. However, the 5% reduction is only a small fraction of the increase in bills and Sunak is not in favor as it would give wealthier households a reduction.
Fuel tax cut by 5p – £1.4bn
The Chancellor has indicated he may go ahead with the reduction after years of fee freezes, despite environmental concerns. Sky-high petrol and diesel prices are now the top priority and Sunak recently highlighted the plight of people in his own rural constituency who are heavily dependent on their cars.
Windfall energy company profit tax – £1.2bn
A one-off tax on energy companies that have done well on the back of soaring prices would be popular with voters, even if it’s a bit out of step with previous Conservative policy. It would bring in £1.2 billion.
Increase in benefits – £9bn
The poorest are hardest hit by rising energy and food prices, with charities warning of a sharp rise in misery, fuel poverty and hunger this year.
Benefit payments are expected to rise 3.1% in April, while inflation is expected to be 8% for the year. The huge reduction in living conditions for millions of low-income families threatens to turn the cost of living crisis into a disaster for many.
To avoid this, the Chancellor could heed pleas from charities, campaigners and think tanks, and increase payments in line with inflation. It would cost £9billion.
Dual energy bill ‘loan’: £5.5bn
A scheme announced in October to slash energy customer bills by £200 has been widely criticized for being inadequate and poorly targeted. The money is repaid through a compulsory levy on all household energy bills for five years.
An easy way for the Chancellor to further reduce citizens’ bills in the short term would be to make this scheme more generous. Doubling it to £400 would cost £5.5 billion. The question for Sunak is: would this money be better spent targeting it to those who need it most?
Cover the renewable energy obligation through taxation
All retail energy customers pay a renewable bond as part of their bill that goes towards investing in green energy. Suppliers have asked for this to be funded directly from taxation. This would mean that £2billion would shift from bill payers to general taxation, which should reduce the burden on the less well-off.
Public sector pay rise – £10bn
Public sector wage settlements have lagged behind soaring inflation. Raising wages in line with the cost of living would help millions of workers and boost the economy.
Rabbit in a hat – ???
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This notice was published: 2022-03-22 18:59:58