Chancellor prioritises his tax cutting credentials over low-and-middle income households with £2 in every £3 of new support going to the top half

In the face of the tightest income squeeze on record, the Chancellor has provided a significant but poorly targeted package of support, the Resolution Foundation said today (Wednesday) in response to the Spring Statement 2022.

Rising inflation is forecast to make the year ahead very difficult for family finances. Real household income per person is set to fall by 2.2 per cent in 2022-23, the largest financial year fall on record going back to 1956-57. The current fall in real wages is not projected to end until late 2023, and will leave average wages no higher than in 2007.

But there was better news on the public finances, with the Office for Budget Responsibility cutting their borrowing projections over the next five years by £42.4 billion. This gave the Chancellor the need and firepower to turn the Spring Statement into a Budget in all-but-name.

With inflation forecast to hit a 40-year high of 8.7 per cent later this year, the Chancellor has chosen to significantly expand his previously announced energy cost support measures that now add up to a total of £19.4 billion. New measures announced today include:

• 5p cut to fuel duty. This will save the typical driving households £75 a year, but even if passed on in full will only reverse 13 per cent of the increase in pump prices over the past year;
• Raising the National Insurance threshold to £12,570 in July. At that point everyone earning below £32,000 will be protected from the increase in NI rates and the income tax threshold freeze, making the NICs system more progressive; and,
• £500 million increase to the Household Support Fund. However, no action was taken to tackle the £11 billion fall in the real value of benefits over 2022-23.

The Foundation’s analysis shows that middle income households gain most as a share of income from this fresh package of support, which is worth around £420 in 2022-23. The average gain across the top half of the income distribution is £475, compared to a gain of just £136 for the poorest fifth of households.

The Foundation notes that the package of immediate support is poorly targeted at those most likely to struggle with the rising cost of living, with only £1 in every £3 announced today going to the bottom half of the income distribution.

Once policies already announced but being introduced in 2022-23 are considered – including National Insurance and Income Tax Rises, along with support on energy bills – the average gain across the income distribution is £110. Significant tax rises mean households in the top half of the income distribution will be worse off by £169 on average as a result of all policy decisions coming into effect in 2022-23.

Tax cuts were not limited to next year, with the Chancellor promising to cut the basic rate of income tax by 1p in 2024-25. This will save an average earner £243 in that year. However, when considered alongside the four-year freeze in the Income Tax Personal Allowance, only those earning over £49,000 will pay less Income Tax in that year.

Despite these tax cuts, Rishi Sunak will remain a tax raising Chancellor, with the tax-rich nature of the recovery seeing receipts actually rise further than previously expected even after accounting for new tax cuts. When combined with previously announced tax rises, tax receipts as a share of the economy are set to reach their highest level since 1982-83 at 40.1 per cent (by 2026-27) – equivalent to an aggregate £3,000 rise per household since the 2019 election.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“It’s hard to overstate the scale of the cost of living crisis coming, with the year ahead bringing the highest inflation in 40 years and the worst income squeeze on record. But while our household finances are being hammered, the public finances have actually improved.

“In response the Chancellor has prioritised burnishing his tax cutting credentials over support for the low-to-middle income households hardest hit by this cost of living storm. Middle and higher income households will gain most from the rise in the National Insurance threshold, but only £1 in every £3 of additional support announced today will go to the bottom half of the income distribution.

“Looking further ahead, the promise to cut Income Tax only benefits those earning over £49,000 once the four-year freeze to the Personal Allowance is taken into account.

“The Chancellor announced a bigger package of measures than expected, but it was a badly designed one with almost no new support for the poorest households. Higher earners will be hardest hit by tax rises, but it makes no sense to raise National Insurance while cutting Income Tax – 21^{s t} Century Britain doesn’t need to do more to make things harder for workers, and easier for landlords.”