Yahoo Finance Sunak to have extra £6bn to help ease UK’s cost of living crisis
Chancellor Rishi Sunak will have an extra £6bn ($7.9bn) in hand to deal with the cost of living crisis as borrowing costs came in well below official forecasts.
Capital Economics forecasts that Sunak will have about £23bn of headroom against his fiscal mandate to ensure debt as a share of GDP is falling in three years’ time, around £6bn more than the fiscal space of £17.5bn he had in October’s Budget.
“What’s more, the chancellor’s three-year ahead fiscal rules give him significant flexibility. This means that he could announce a very large package of support so long as it is temporary and drops out before 2025/26,” Capital Economics said in a new report.
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This creates a fiscal space for Sunak to respond to a squeeze on living standards that is set to worsen in April, when a £12bn payroll tax increase is scheduled to coincide with a 50% jump in energy bills.
Capital Economics said the chancellor has enough fiscal space “to offset the £10bn (0.5% of GDP) fall in the level of real household disposable income in 2022.”
However, Capital Economics warned that anyone with hopes Sunak will announce “a big handout may be disappointed”. The chancellor is expected to try to strike a balance between the near-term political benefits of supporting households now and the medium-term political benefits of fiscal restraint “that will allow him to loosen the purse strings ahead of the May 2024 general election,” the report said.
“Overall, we expect the Spring Statement to contain policy measures worth around £10bn (0.5% of GDP). That would be rather smaller than most are expecting.
“But the chancellor will no doubt try to get as big a political bang for his buck with some headline-grabbing measures, such as a temporary 5p cut to fuel duty,” Capital Economics said.
Fast-rising inflation, which looks on course to top 8% after Russia's invasion of Ukraine, has led to calls for Sunak to provide more support as families face the biggest income squeeze in nearly 50 years.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said Sunak faced a huge judgment call about whether to protect households from the energy price surge.
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"If he doesn't, then many on moderate incomes will face the biggest hit to their living standards since at least the financial crisis," Johnson said. "If he does, then there will be another big hit to the public finances."
Capital Economics said that if the chancellor were to unveil all of the measures that have been rumoured, that would cost about £51bn (2.2% of GDP).
That involves a doubling of October’s energy bill rebate from £200 to £400 (which would cost £5.5bn), a 5p cut to fuel duty (costing £1.4bn), a temporary VAT reduction on domestic fuel (£2.4bn), or to shoulder utility firms’ renewable obligation (£2bn).
A rollback in the planned fiscal tightening, such as the unfreezing of tax thresholds associated with income tax, VAT and inheritance tax from April 2022 would cost £1.8bn.
Sunak will deliver his spring statement on Wednesday.
