A cut to fuel prices, changes to National Insurance thresholds and a promise on income tax. Some of the things Rishi Sunak announced in his Spring Statement may sound good, but who will they actually help and how much?
The background to the Chancellor's mid-year mini budget is the Office for Budget Responsibility's bleak warning that real living standards are set to fall by 2.2% in the coming year (2022-23), which it called "the largest financial year fall on record". As records began in 1956, that's the biggest fall in living standards in the UK in 66 years. The hit to our spending power is driven by the massive amount more we'll be paying for gas, electricity and fuel- and the impact those rising prices have on the cost of everything else we buy.
The other relevant fact is that with wages set to rise in the coming year as well, albeit lower than the 8.7% predicted peak of inflation, the Treasury will be bringing in more in taxes. So the Chancellor had some room to ease the impact of rising prices. That capacity to help is limited by the fact government debt has hit 96% of GDP as a result of the pandemic and it will have to pay more in interest as rates rise. The questions we needed to wait for Rishi Sunak to answer were how he'd choose to use that limited firepower, who would benefit and how generous he would be.
Read more: What Rishi Sunak's Spring Statement means if you live in Wales
The reaction so far has been some surprise that the Chancellor went as far as he did - with Money Saving Expert Martin Lewis saying it went further than he expected. But it came with a far stronger sense that the very poorest in society will still lose out - and that Sunak's help will only make a small dent in the economic pain that is coming. If gas and electricity prices rise again in October, which they are set to based on current wholesale prices, the expectation is that more help will be needed.
What stood out for some commentators was the fact that the Mr Sunak's help was directed at those with cars and those with incomes - with the poorest set to miss out entirely.
Institute for Fiscal Studies director Paul Johnson said: "Perhaps what really stands out today is what was missing. In the face of what the OBR calls the biggest hit to household finances since comparable records began in 1956-57, [Mr Sunak] has done nothing more for those dependent on benefits, the very poorest, besides a small amount of extra cash for local authorities to dispense at their discretion.
"Their benefits will rise by just 3.1% for the coming financial year. Their cost of living could well rise by 10%."
Most of us will be paying more tax
Mr Johnson of the IFS in his response said Mr Sunak's National Insurance threshold rise and promised tax cut weren't really cuts at all as the tax take would not fall because of the rising tax revenues caused by inflation.
He said: "The cuts to income tax and National Insurance are effectively paid for by increasing revenues as a result of fiscal drag. The freezing of the income tax personal allowance and higher rate threshold turn out to be much bigger tax rises than first intended. As a result, almost all workers will be paying more tax on their earnings in 2025 than they would have been paying without this parliament’s reforms to income tax and NICs, despite the tax cutting measures announced today."
Only those earning between £10k a year and £25k a year will pay less tax
The IFS said that "for the coming year as a whole (2022-23), those earning between around £10,000 (the current NICs threshold) and £25,000 will pay less tax on their earnings as a result of these changes. Those earning more than £25,000 will pay more, due to the combined effect of freezing income tax thresholds and increasing the NICs rate."
However it said that "by 2025-26 - after the cut to the basic rate of income tax has been implemented and thresholds have continued to be frozen - virtually all workers will be paying more tax on their earnings than they would have paid without these changes to rates and thresholds. This is because freezing thresholds for four years is now set to have such a large impact, given the rise in expected inflation over this period."
Someone on £27,500 a year will be about £360 a year worse off (just from taxes)
The IFS said that bringing together the expected changes in earnings, the reforms to taxes, and the energy measures announced in February, a median (middle) earner on £27,500 per year can expect to be about £360 worse off this year than they were last.
A full-time worker on the National Living Wage fares a little better (gaining £140) because of the NLW rising by more than average earnings (though less than inflation) and because of the increase in the NICs threshold.
The fuel duty cut will save the average driver just £100
Fuel duty will be cut by 5p from 6pm on Wednesday, March 23. The Treasury's own estimates suggest this will save most drivers around £100. Van drivers will benefit by £200 and haulier's by £1,500. It will cost the exchequer £2.3bn in the coming year.
However those savings are dwarfed by the added costs caused by the rise in petrol and diesel prices. Prices at the pump have risen by far more than 5p in recent months. SMEs are reportedly paying 40% more for diesel than last year and still face significantly increased transport costs.
Edmund King, AA president, said the organisation welcomed the cut but said "we are concerned that the benefit will be lost unless retailers pass it on and reflect a fair price at the pumps. Average pump prices yesterday hit new records- despite the fall in wholesale costs." He said their research showed that in November, when petrol pump prices set new records at around 148p a litre, 43% of drivers were cutting back on car use, other spending to compensate or both. Petrol started this week averaging 167p a litre."
The poorest get nothing from raising the National Insurance threshhold
Rishi Sunak announced that National Insurance starting thresholds will rise to £12,570 from July, which he says means hard-working people across the UK will keep more of what they earn before they start paying personal taxes.
The cut is worth over £6 billion and will, the Treasury say, benefit 1.2 million working people in Wales with a typical employee saving over £330 a year, whilst the typical self-employed person will save over £250. However on every penny you earn over than threshold you'll now be paying more tax due to the National Insurance hike to pay for the NHS, so the impact is reduced.
Martin Lewis, from moneysavingexpert.com, said: "If you earn £35,000 or more the 1.25 percentage point increase outweighs the change in the starting threshold so you will pay more National Insurance."
The Joseph Rowntree Foundation is a social change organisation working to solve UK poverty. Their head of economics, Dave Innes, said: "Changes to National Insurance won’t help those who aren’t working or can’t work due to disability, illness or caring responsibilities, and exposes them to an increased risk of becoming destitute. This means they will face regularly going without absolute essentials such as food, energy and basic hygiene products."
The IFS agreed, saying: "Things are likely to be much tougher for those out-of-work on state support (including pensioners). Inflation is expected to average 8% this year, whereas benefits are due to only go up by 3.1%, implying a (temporary) cut in the real value of benefits of about 5%. The flat rate support for rising energy costs will offset some of that, but in most cases only partially."
The income tax cut that sees us pay more tax
From 2024, the basic rate of income tax will also be cut by 1p in the pound in England, Wales and Northern Ireland. The timing of that, aside from it coming into play in what is likely to be an election year, is that it is two years away and not going to help anyone now.
According to the OBR, the net impact of the tax policies announced will mean tax receipts are £43.8 billion higher in 2024-25 because of the impact of Rishi Sunak’s freezing of income tax thresholds, which will cost taxpayers £17.5 billion a year. By 2025-26, 2.8 million low earners will be dragged into paying income tax and two million middle-earners will be dragged into the higher rate because of the freeze.
Doubling the Household Support Fund 'a drop in the ocean'
Mr Sunak said the Household Support Fund will be doubled to £1 billion. That is a scheme for councils in England to distribute to those who need essentials over the winter. While that fund does not cover Wales, the UK Government say it will result in a Barnett consequential of £25m for Wales. It will be up to Welsh Government how it spends that money.
Dave Innes, from the Joseph Rowntree Foundation, said this is a "drop in the ocean when we consider the number of people who will reach crisis point in the coming months, from the pressure of energy bills alone. "
This scheme is for the most vulnerable, so in terms of helping those who are feeling the pressure the most, there is some help there. However, it is to help with "daily needs" like food, clothing, and utilities and doesn't address those at the root of the problem.
No VAT on improving homes' energy efficiency
The Chancellor also reduced the VAT on energy saving materials such as solar panels, heating pumps and roof insulation from 5% to zero, helping families become more energy-efficient. These cuts all apply to Wales.
Plaid Cymru's Ben Lake said his party welcomed the cut to VAT on energy efficiency measures as "Wales has the leakiest, least energy efficient housing stock of any UK nation" but it needs to be a coordinated programme "according to need".
However, Martin Lewis said this is not a short term solution and only for those who have disposable income. "For those people who can afford to insulate or get better energy efficiency measures in their house it will be a benefit in the future".
