How to ease Britain’s cost of living crisis

This is not where British Chancellor Rishi Sunak would like to be. This year was to be the start of the post-pandemic period of his chancery. After spending huge sums on coronavirus support programs, then winning internal party arguments for higher funding, catch-up, spending on public services through taxes rather than borrowing , he could now be the true small-state, low-tax conservative that he really is. . The spring statement he will make on Wednesday, however, will likely see him having to hand out fiscal largesse again. Whatever his qualms about government spending, it’s the right thing to do.

Sunak will have room in the borrowing forecast to spend while meeting his budget goals. While the Office for Budget Responsibility, Britain’s fiscal watchdog, is likely to revise its growth forecast downwards – thanks to the effects of higher oil prices on consumers’ purchasing power – the rise inflation has also boosted tax revenues. Even before the latest commodity price spike, revenue was already better than expected this year as the economy rebounded quickly from the coronavirus pandemic.

However, only the borrowing outlook has improved. Inflation is rising and growth is slowing. Like much of the rest of the wealthy world, Britain faces the prospect of stagflation and a sharp squeeze in living standards. Planned increases in taxes, to fund post-pandemic services, will further reduce household purchasing power. The Bank of England, too, is ahead of the other major central banks in raising rates.

Earlier this year, before Russia invaded Ukraine, Sunak announced a loan program to support those with higher energy bills. Administered through municipal tax brackets, a local government tax system based on home values ​​and often not updated since the early 1990s, it could have been better targeted at the most vulnerable. Still, the easiest and quickest way to help is to advance a planned increase in the Universal Low-Wage Credit, bringing it in line with expected inflation now rather than later in the year.

Sunak’s experience during the pandemic has made him uncomfortable with “temporary” gifts, believing they are difficult to untie when times return to normal. Accelerating an already planned increase in the benefit should therefore please him. This will not, in the long term, increase the amount that Universal Credit recipients receive. The Chancellor should also consider changing the loan scheme to a simpler repayment. As bad as he thought the cost of living crisis was when he started the program, it has gotten significantly worse.

The same logic on the difficulty of unwinding the temporary measures should apply to any plan to abolish or reduce fuel taxes. It would be politically popular, but a mistake. Rising energy prices provide a useful market signal to save on a scarce resource and invest in energy efficiency. The job of government policy should be to ease the transition rather than blunt the message that the country needs to reduce its reliance on fossil fuels.

Sunak is right to say that in the longer term, any extra room in Britain’s fiscal plans should be devoted to increasing the rate of productivity growth – this is the best guarantee of a more permanent improvement in the level of life. Extending capital expenditure deductions, which can be deducted from corporation tax, would be a good start. However, the Chancellor will have to wait a while longer to clarify the rest of his tax cut plans for Britain.

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