Families face the biggest hit to their living standards on record as the tax burden rises to its highest level in 70 years amid surging inflation and a raid on National Insurance.
Taxes will account for more than 36pc of GDP, up from 33pc before Covid, representing the fastest jump in the burden in a generation and taking the Treasury’s haul to its highest level since the late 1940s.
At the same time households will suffer the biggest drop to their spending power on record as they are beset by tax rises and surging inflation.
The Office for Budget Responsibility warned that real household disposable incomes will fall by 2.2pc this year, the biggest annual drop on records dating back to the 1950s. The Chancellor, Rishi Sunak, refused to cancel a planned rise in National Insurance but vowed to cut income tax by 1p to 19p by 2024.
The crisis represents a bigger hit than families suffered during the pandemic or the financial meltdown in 2008.
The OBR said it is also a worse blow than the recessions of the 1990s or 1980s, and will hit spending power even more than the oil shocks of the 1970s.
The official forecasters expect inflation to peak at close to 9pc in October when energy bills soar again, marking the highest rate of price increases in about 40 years.
Inflation will average 7.4pc this year, according to the official forecasters, almost double the 4pc average, and 4.4pc peak, which it predicted at October’s Budget.
By contrast, earnings are forecast to rise by 5.3pc, an improvement on October’s predictions of below 4pc but still far below prices.
Tax and benefit changes will drag disposable incomes down by 2.2pc, adding to households’ pain.
Mr Sunak insisted he is helping with the cost of living with February’s £9bn package of council tax rebates and energy bill loans, as well as a move to limit the impact of next month’s National Insurance raid by increasing the threshold at which workers pay the tax.
From July employees will only pay the tax on income of above £12,570 per year, limiting the effect of the Chancellor’s 1.25 percentage point tax rise to those on higher incomes.
He held out the promise of future tax cuts to partially reverse the impact. The Chancellor said he would take a penny off the basic rate of income tax, from 20pc to 19pc, by the end of this parliament.
Mr Sunak is also cutting fuel duty temporarily by 5p in acknowledgement that prices have jumped to unprecedented highs of above 165p a litre with diesel close to 180p.
The OBR said these measures “offset half the blow to household finances from higher energy and fuel bills and a third of the overall fall in living standards that households would otherwise have faced”.
The extreme fuel prices are in part a consequence of Russia’s invasion of Ukraine which has wrought havoc in commodities markets, including oil and gas.
This is worsening the already severe spike in inflation, which is in turn undermining the economic recovery as it hammers households’ spending power.
The OBR has slashed growth forecasts, predicting GDP will rise by 3.8pc this year, down from its previous prediction for a strong 6pc expansion.
Growth will slow further to 1.8pc next year, bouncing about the 2pc mark in following years.
Even as slower growth weighs on the recovery of public finances, rising inflation and interest costs pushes up the interest bill on the nation’s £2.2 trillion national debt to a new record high of £83bn.
Economists said Mr Sunak’s plans are not enough to help families given the scale of the inflationary tidal wave.
Carys Roberts, executive director at the Institute for Public Policy Studies, called the proposals “woefully out of touch with the reality facing millions of families, who face being pulled into poverty and debt”.
“We’re going into the biggest incomes squeeze in a generation and yet the Chancellor hasn’t offered the help that many households need,” she said.
Spring Statement – at a glance
-
Chancellor to cut the basic rate of income tax from 20p to 19p in the pound before the next election
-
Fuel duty to be cut by 5p a litre from Wednesday night for 12 months
-
National Insurance threshold raised by £3,000, allowing workers to earn £12,570 before it kicks in – a £6bn tax cut worth more than £330 a year for employees
-
Household support fund doubled to £1bn
-
VAT on energy-saving materials such as heat pumps and solar panels cut from 5pc to zero
