UK Chancellor Rishi Sunak has today delivered his mini-budget in order to help struggling British families and address a number of growing concerns: soaring inflation, fiscal drag from frozen tax allowances and National Insurance increases from April.

In his statement delivered to the Commons at lunchtime, the Chancellor first highlighted the war in Ukraine, saying he would respond to the conflict by building a stronger and more secure economy for the UK – as Britain’s economic strength underpinned freedom and liberty: “The actions we have taken to sanction Putin’s regime are not cost-free for us at home. The invasion of Ukraine presents a risk to our recovery as it does to countries around the world.”

The fact that Sunak has used the war in Ukraine to set the tone for his statement seems to be a strategy to at least partly attribute what is being termed a ‘cost of living crisis’ to the conflict. Although the war has indeed put additional pressure on the UK economy, consumers were already facing a 30-year high inflation rate and increasing energy prices. This opening remark was clearly used to swerve any direct blame for the growth slowdown, which was predicted well before the Russian invasion.

Growth

The Office for Budget Responsibility (OBR) showed that the economy grew by 7.5% in 2021, after a fall of 9.4% in 2020 – the biggest decline for a century – during the first wave of the pandemic. The Chancellor said forecasts showed the economy would grow by 3.8% this year; but in October, the OBR had forecast growth of 6% for 2022 as the UK economy recovered from the Covid pandemic.

Rishi used these figures to highlight the difficult choices he has had to make and once again, directly linked the data to the conflict in Ukraine.

Cost of Living

Inflation is due to average 7.4% this year and many households have been forced to choose between heating and eating this winter. Energy bills are increasing dramatically as sanctions on Russia kick in following post-pandemic production problems. In response, Sunak is to cut fuel duty in only the second time in 20 years, by 5p a litre for the next 12 months, effective tonight at 6pm. In a bid to please both sides of the energy debate, the government will also cut VAT to zero from 5% for those wanting to install energy efficient devices in their homes, such as solar panels, insulation or heat pumps.

Borrowing

The Chancellor said: “We should be prepared for the economy and public finances to worsen potentially significantly.” Over £4bn is being written off by the Treasury due to Covid loans fraud, particularly the Bounce Back loans. That represents roughly 1p on Income Tax. Borrowing in the current financial year 2021-22 would be 5.4% of GDP, falling to 3.9% next year – in monetary terms, the budget deficit would be £127.8bn in 2021-22, falling to £99.1bn next year. Net public sector debt was forecast to be 95.6% of GDP in 2021-22, falling to 83% of GDP in the next 5 years. Debt servicing costs next year will be the highest on record at £83bn, with March being the third month in a row to break monthly debt interest levels.

Fiscal Drag

Fiscal drag is caused by tax allowances and thresholds remaining frozen, whilst incomes increase. This results in more income being brought into higher rates of tax purely through stealth. A year ago, in March 2021, the Chancellor announced that personal allowances and income tax thresholds would be frozen until 2026.

National Insurance

Sunak has stood firm on his planned 1.25% rise in National Insurance Contributions (NIC) for workers and employers, calling it “a dedicated funding source for health and social care”, ie a Health & Social Care Levy.

In a counter move, the Chancellor also announced that he would be equalising the NIC threshold with that of the personal income tax allowance to £12,570. This is a huge increase of £3,000 instead of the planned £300 and will be particularly welcomed by middle-income families. He called it a “£6bn personal tax cut for 30 million people” and the “largest single personal tax cut in a decade”, as people will now be able to earn £12,570 a year without paying any income tax or National Insurance.

Income Tax

The Chancellor has also gambled that the UK’s fiscal position will be stable enough for him to cut the basic rate of tax from 20% to 19%, in the first such move for 16 years. However, he caveated that by adding that it would not be responsible to make such a tax cut right now, due to the uncertainty in the economy, instead pushing it out to 2024: “tax cuts must be paid for, they must be prioritised and they must fit the economic circumstances of the time.”

Business Investment

Sunak has often stated the need to work towards a high-productivity economy. He will therefore make changes in the autumn to research and development tax credits, adding that “something is not working” with the current productivity investment. It is his hope that these business investment reliefs will boost UK productivity. He also announced that he would increase employment allowance for small businesses to £5,000 starting in 2 weeks’ time, equating to a £1,000 tax cut for half a million small firms.

Hospitality Industry

Despite calls by representatives of the hospitality industry to freeze VAT at 12.5%, no such announcement was made. Hospitality businesses will now face a return to 20% VAT from next month as they struggle for survival.