Britain will take steps to mitigate impact of inflation, says finance minister
In Britain, the economic shock waves from the war in Ukraine are exacerbating the squeeze on household budgets and heightening fears of a cost of living crisis. The British government announced some measures on Wednesday to help people cope with rising prices, which are at their highest level in three decades, including cutting petrol prices.
But the plan, which included tax cuts and additional benefits for low-income people, has been criticized by analysts and opposition lawmakers, who have pointed to Britain’s growing economic difficulties.
Rishi Sunak, the Chancellor of the Exchequer, said sanctions against President Vladimir V. Putin’s government and efforts to isolate Russia were weighing on Britain’s economy. This was felt most in the cost of living, he said. Hours earlier, the government announced that inflation was at its highest level since 1992, with prices up 6.2% from a year earlier.
“The steps we have taken to sanction the Putin regime are not free for us at home,” Sunak told lawmakers as he announced an update to the Treasury’s fiscal and budget plans on Wednesday. “The invasion of Ukraine poses a risk to our recovery – as it does to countries around the world.”
The Office for Budget Responsibility, which provides independent economic and fiscal forecasts to the government, has downgraded its outlook for the UK economy. Gross domestic product will grow 3.8% this year and 1.8% next year, he said on Wednesday. Five months ago, the agency predicted growth of 6% this year and 2.1% in 2023. Inflation will average 7.4% this year and not fall below the target of 2 % of the central bank before 2024, she said.
The outlook for household incomes is even bleaker. With inflation taken into account, household disposable income per person will fall 2.2% in the next fiscal year beginning in April, the agency said. It would be the biggest drop in a single year since official records began in 1956.
Despite the deteriorating economic outlook, Sunak seemed reluctant to deviate too far from his past spending and fiscal plans. His speech was the first Treasury budget announcement since Britain ended its pandemic restrictions, having spent an estimated 311 billion pounds ($410 billion) on its virus response to health services, businesses and workers. Mr. Sunak has repeatedly reiterated the need to consolidate public finances, temporarily increase taxes and reduce public spending.
The interventions announced on Wednesday were limited. For a year, the government will cut petrol and diesel tax by 5p a litre, which it says will save the average driver around £2 a week. Local authorities will receive an additional £500million to support low-income households. And the biggest announcement of the day was the increase in the income threshold workers must meet before paying National Insurance, a general tax that funds state pensions and some benefits.
“The reduction in fuel taxes, while very welcome, is just a drop in the ocean compared to the larger tsunami of rising costs weighing on businesses and households,” said Shevaun Haviland, Chief Executive of the British Chambers of Commerce. A declaration.
Before Wednesday’s announcements, Mr. Sunak was expected to make bolder moves. The data showed borrowing was lower than earlier forecasts, leading some economists to conclude the Treasury has room to spend more. Others, pointing to rising prices, said the government should scrap its plan to increase National Insurance for employers and workers next month, to reduce the backlog at the National Health Service and fund the adult social care.
The government is sticking to this plan.
“What really stands out today is what was missing,” said Paul Johnson, director of the Institute for Fiscal Studies, a London think tank, in a statement. Mr Sunak “has done nothing more for those who depend on the allowances, the poorest, apart from a small amount of extra money which local authorities can distribute at their discretion”, he said.
For months campaigners have warned that people on low incomes and those on UK government benefits are already being overstretched by rising energy bills, petrol prices and food prices. Households had started to reduce their expenses by switching off the heating for longer periods of the day during the winter or by giving up takeaway meals, for example. Next month the price cap on the energy bills of millions of homes will rise by 54%, or around £700, due to the rise in wholesale natural gas prices last year.
The Russian-Ukrainian War and the World Economy
Mr Sunak has come under intense pressure to cushion the impact of price rises, and in February the Treasury said it would spend around £9billion to offer most households up to £350 off on their bills this year in the form of loans and taxes. discounts. But the situation has since worsened. Inflation is expected to peak at nearly 9% in the fourth quarter, the Office for Budget Responsibility said, as energy bills jump again when the price cap is reset in October.
On Wednesday, Mr Sunak said he was scrapping VAT, a type of sales tax, on products such as insulation, heat pumps and solar panels, which improve the energy efficiency of homes, to make in the face of rising energy bills.
Mr Sunak’s tenure as Chancellor began just as the coronavirus arrived in Britain and was characterized by crisis management. His unprecedented plan to pay up to 80% of the salaries of millions of people when the economy went into lockdown in March 2020 made him incredibly popular. And there were other generous grant and loan programs for businesses. But over time, his efforts to cut vast pandemic-era government spending have led to political reversals and a decline in popularity.
In October, looking to the end of the pandemic, he presented his plan for an “economy fit for a new era of optimism”, proposing sweeping spending plans to improve education, the National Health Service and the Professional skills. Still, the Office for Budget Responsibility has warned that post-Brexit labor shortages, shrinking trade, supply chain disruptions and rising energy bills will weigh on economic growth.
In a speech last month, Mr Sunak said he wanted to build a “new corporate culture” and an economy based on “free market principles”. In this view, increased public spending is not the solution to fix Britain’s weak productivity growth. Private business investment was paramount.
But Britain and mainland Europe emerged from one crisis and quickly found themselves in the middle of another, with businesses arguing for more government support. Russia, a major commodity producer, is economically isolated, and British and European Union leaders have announced their intention to make their economies independent of Russian oil and gas, a transition that could lead to higher prices short-term energy, more inflation global and difficult political choices.