We will all pay a price for Rishi Sunak’s dramatic spring statement

Chancellor couldn’t resist temptation to divert attention from the worst cost-of-living crisis since the 1950s

<p>It is highly unusual to announce a tax cut two years ahead</p>

It is highly unusual to announce a tax cut two years ahead

Kenneth Clarke, the former chancellor, used to say that the job should not be about delivering good news. In theory, Rishi Sunak would agree.

Yet in his mini-Budget today, Sunak could not resist the temptation to divert attention from the worst cost-of-living crisis since the 1950s by announcing that the basic rate of income tax will be cut from 20p to 19p in 2024 – conveniently, on the eve of the next general election.

The unexpected move turned what was originally going to be a bland holding statement into a dramatic one. Tory backbenchers loved it. Many of them, and Boris Johnson, failed to persuade Sunak to postpone next month’s 1.25 percentage point rise in national insurance contributions, making the UK the only G7 country to raise taxes when living standards are falling. But Sunak sugared this pill with another significant move – raising the starting rate at which people pay national insurance by £3,000 to £12,570, bringing it into line with income tax.

The surprise 1p income tax cut was dismissed as “jam tomorrow” and “crumbs just before an election” by Labour, but it was clever politics. Inevitably, the Tories will challenge Labour at the next election to say whether they would reverse it; Keir Starmer will surely avoid that elephant trap and promise to keep it. Instead, Labour will be pushed further down the road of taxing wealth, without formally calling it a “wealth tax.”

It is highly unusual to announce a tax cut two years ahead. The Tories cannot afford not to deliver it, having already broken their 2019 manifesto pledge not to raise the rate of national insurance.

Clearly, the chancellor has been stung by Labour’s charge, echoed by the CBI, that he is delivering a “high tax, low growth” economy – the polar opposite of his desire for a “low tax, higher growth” one. But he is a long way from turning this around: expected growth this year has been downgraded to 3.8 per cent and the tax burden is at its highest for 70 years.

Indeed, Sunak’s critics will accuse him of a sleight of hand, saying his proposed tax cuts will wipe out only about a fifth of the 15 tax rises he has already introduced. He insisted there was room for the income tax cut in his plans. Yet he also admitted that because of the war in Ukraine, the public finances could worsen significantly.

Pulling a big political rabbit out of his hat will grab the headlines and delight Tory-supporting newspapers, who had also urged him to delay next month’s national insurance rise. It will certainly do Sunak’s leadership aspirations no harm.

But there will be big implications for the country. The main one will be to put enormous pressure on public services, which will already be squeezed by higher-than-expected inflation, which will peak at a 40-year high of 9 per cent, according to the Office for Budget Responsibility (OBR) today. Expect yet another period of public sector pay restraint on top of the squeeze during the decade of austerity.

Although the NHS and (eventually) social care will get £12bn a year from the ring-fenced national insurance rise, the health service might well need more to prevent waiting lists becoming the Tories’ Achilles heel at the next election. There will be huge pressure, probably from Johnson and other cabinet ministers, to raise defence spending to combat the Russian threat. Sunak is resisting for now, but the demands may become unstoppable if he is to live up to his Churchillian opening statement about defending Ukraine and democracy.

Such pressures are bound to impose a squeeze on other Whitehall departments; several of Sunak’s cabinet colleagues will not be overjoyed when the ink dries on his statement. There will be yet another drive to find efficiency savings, but the low-hanging fruit has already been picked.

Sunak did offer a little jam today, with a crowd-pleasing 5p-a-litre cut in fuel duty. He said this was for one year only – but after a decade in which this duty has been frozen, he knows it will be very hard to reverse the cut in 12 months, especially at a time of high energy prices.

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Sunak’s statement had a huge hole where its heart should have been – immediate help for the poorest. His emphasis was on those in work. While he doubled to £1bn a hardship fund for local authorities, he did nothing directly for those who rely on benefits, such as the jobless and disabled.

State benefits, including pensions, will rise by 3.1 per cent next month, when inflation could be heading for 8 per cent, so this amounts to a £10bn cut. Sunak should have raised universal credit to help the most vulnerable through what the OBR warned will be the biggest drop in real household disposable incomes since records began in 1956-57.

Although the chancellor has probably put something in his back pocket to cushion what will likely be another hike in energy bills in October, his package failed to measure up to the scale of the living standards crisis.

The danger for Sunak is that voters remember the pain of that and are not impressed by his taking tax with one hand next month and giving some of it back with the other in 2024. The danger for the Tories is that his strategy reinforces the impression of “partygate”: of a ruling elite out of touch with those they purport to serve.

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