The British government announced measures to help people cope with rising prices, including cutting gas prices at the pump.Credit…Mary Turner for The New York Times
In Britain, the economic shock waves of the war in Ukraine are exacerbating a squeeze on household budgets and heightening fears of a cost-of-living crisis. The British government announced some measures on Wednesday to help people cope with the rising prices, which are at their highest level in three decades, including cutting gas prices.
But the plan, which called for some tax cuts and additional benefits for low-income people, was met with criticism from analysts and opposition lawmakers, who pointed to Britain’s deepening economic woes.
Rishi Sunak, the chancellor of the Exchequer, said the sanctions on President Vladimir V. Putin’s government and the efforts to isolate Russia were weighing on the British economy. This was most acutely felt in the cost of living, he said. Hours earlier, the government reported that inflation was at its highest level since 1992, with prices rising 6.2 percent from a year earlier.
“The actions we have taken to sanction Putin’s regime are not cost free for us at home,” Mr. Sunak told lawmakers as he announced an update to the Treasury’s tax and budget plans on Wednesday. “The invasion of Ukraine presents a risk to our recovery — as it does to countries around the world.”
The Office for Budget Responsibility, which provides independent economic and fiscal forecasts for the government, downgraded its outlook for the British economy. Gross domestic product will increase 3.8 percent this year and 1.8 percent next year, it said on Wednesday. Five months ago, the agency forecast growth of 6 percent this year and 2.1 percent in 2023. Inflation will average 7.4 percent this year and won’t fall back below the central bank’s target of 2 percent until 2024, it said.
The outlook for household incomes is even bleaker. With inflation factored in, household disposable income per person will drop 2.2 percent in the next fiscal year beginning in April, the agency said. That would be the largest fall in a single year since official records began in 1956.
Rishi Sunak, the chancellor of the Exchequer, said he was removing VAT, a type of sales tax, on products to improve energy efficiency in homes.Credit…Peter Cziborra/Reuters
Despite the deteriorating economic outlook, Mr. Sunak seemed reluctant to deviate too far from his previous spending and tax plans. His speech was the Treasury’s first fiscal announcement since Britain ended its pandemic restrictions, having spent about 311 billion pounds ($410 billion) on its virus response for health services, businesses and workers. Mr. Sunak has repeatedly stated the need to repair the public finances, temporarily raise taxes and reduce government spending.
The interventions announced on Wednesday were limited. For a year, the government will cut taxes on gasoline and diesel by 5 pence a liter, which it says will save the average car driver about £2 a week. Local authorities will get another £500 million to support low-income households. And the biggest announcement of the day was the increase in the income threshold that workers must meet before paying National Insurance, a broad tax that funds state pensions and some benefits.
“The cut in fuel duty, though very welcome, is just a drop in the ocean compared to the larger tsunami of surging costs that is bearing down on firms and households,” Shevaun Haviland, director general of the British Chambers of Commerce, said in a statement.
Before Wednesday’s announcements, expectations had been raised that Mr. Sunak would make bolder moves. Data showed that borrowing was less than previously forecast, leading some economists to conclude the Treasury had room to spend more. Others, pointing to rising prices, said the government should scrap its plan to raise National Insurance for employers and workers next month, to ease the backlog at the National Health Service and fund adult social care.
The government is sticking to this plan.
“What really stands out today is what was missing,” Paul Johnson, the director of the Institute for Fiscal Studies, a London think tank, said in a statement. 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,” he said.
Britain spent about $410 billion on its emergency pandemic response.Credit…Andrew Testa for The New York Times
For months, campaigners have warned that low-income people and those receiving British government benefits were already stretched too thin by higher energy bills, gasoline prices and food costs. Households had begun cutting back on spending by turning off the heating for longer stretches of the day through winter or forgoing takeout meals, for example. Next month, the price cap on energy bills for millions of households will rise 54 percent, or about £700, because of wholesale price increases for natural gas last year.
Mr. Sunak has been under intense pressure to cushion the impact of price increases, and in February, the Treasury said it would spend about £9 billion to give most households up to £350 off their bills this year in the form of loans and tax rebates. But the situation has gotten more severe since then. Inflation is expected to peak at nearly 9 percent in the fourth quarter, the Office for Budget Responsibility said, as energy bills jump again when the price cap is reset in October.
On Wednesday, Mr. Sunak said he was removing VAT, a type of sales tax, on products such as insulation, heat pumps and solar panels, which improve energy efficiency in homes, to tackle rising energy bills.
Mr. Sunak’s tenure as chancellor began just as the coronavirus arrived in Britain, and has been characterized by crisis management. His unprecedented plan to pay up to 80 percent of the wages of millions of people when the economy locked down in March 2020 made him incredibly popular. And there were other generous grants and loan programs for businesses. But over time, his efforts to shrink the vast pandemic-era public spending have resulted in policy U-turns and a drop in popularity.
In October, looking toward the end of the pandemic, he presented his plan for an “economy fit for a new age of optimism,” proposing large spending plans to enhance education, the National Health Service and job skills. Yet the Office for Budget Responsibility warned that post-Brexit labor shortages, decreases in trade, supply chain disruptions and rising energy bills would weigh on economic growth.
In a speech last month, Mr. Sunak said he wanted to build a “new culture of enterprise” and an economy focused on “free market principles.” In this vision, more government spending is not the answer to fixing Britain’s lackluster productivity growth. Private business investment was paramount.
But Britain and continental Europe have exited one crisis and quickly found themselves in the middle of another, with businesses pleading for more government support. Russia, a major commodity producer, is being economically isolated, and British and European Union leaders have announced plans to make their economies independent of Russian oil and gas, a transition that is likely to lead to higher energy prices in the short term, more inflation overall and tough policy choices.