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How to alleviate Britain’s cost of living crisis

This is not the British Chancellor’s place Rishi Sunak would like to be. This year was to mark the beginning of the post-pandemic period of his chancellorship. After spending huge sums on coronavirus support programs and then winning the internal party argument for funding higher, catching-up public service spending through taxes rather than loans, he may now be the true microstate, low-tax conservative that he really is. However, the springtime statement he is set to make on Wednesday will likely result in him having to dish out more fiscal bounty. Whatever his concerns about government spending, this is the one.

Sunak will have space in credit forecasts spend and still meet its budgetary targets. While the Office for Budget Responsibility, the UK tax regulator, is likely to downgrade its growth forecasts – thanks to the impact of higher oil prices on consumer spending power – the rise in inflation has also boosted tax revenues. Even before the recent rise in commodity prices receipts already came in better than expected this year as the economy recovered quickly from the coronavirus pandemic.

However, only the prospects for borrowing have improved. Inflation is rising and growth is slowing. Like much of the rest of the rich world, Britain faces the prospect of stagflation and deep pressure on living standards. Planned tax hikes to fund post-pandemic services will further reduce household purchasing power. The Bank of England is also ahead of other major central banks when it comes to rate hikes.

Earlier this year, ahead of Russia’s invasion of Ukraine, Sunak announced a loan program to help those struggling with higher energy bills. Administered through the council tax margins, a system of local government taxes based on home values ​​that has often not been updated since the early 1990s, it could have been better targeted to the most vulnerable. However, the easiest and quickest way to help is to bring forward a planned increase in universal credit benefits for low earners and raise them in line with projected inflation now rather than later in the year.

Sunak’s experience during the pandemic has left him uncomfortable with “temporary” giveaways, believing they will be difficult to untie once times return to normal. The acceleration of an already planned increase in performance should therefore appeal to him. In the long term, it will not increase the amount Universal Credit recipients receive. The Chancellor should also consider changing the loan system to a simpler rebate. As bad as he thought the cost-of-living crisis was when he started the program, it has gotten dramatically worse.

The same logic about the difficulty of lifting temporary measures should apply to any plan to eliminate or reduce fuel taxes. It would be politically popular, but a mistake. Rising energy prices are a useful market signal to economize on a scarce resource and invest in fuel efficiency. The task of government policy should be to ease the transition, rather than weakening the message that the country needs to reduce its dependency on fossil fuels.

Sunak is right that, in the longer term, any additional room in UK budgets should be devoted to boosting productivity growth – the best guarantee of a more lasting improvement in living standards. An expansion of the investment allowance that can be claimed against corporate income tax would be a good start. However, the Chancellor will have to wait a while before clarifying the rest of his UK tax cut plans.

https://www.ft.com/content/1facd75f-deb6-45d1-a225-312fd96ff9e6 How to alleviate Britain’s cost of living crisis

Adam Bradshaw

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