Sunak’s tax hikes could worsen UK cost of living crisis, experts warn



Tax hikes and soaring bills will cause the biggest shock to household incomes in nearly half a century and risk deflecting the UK’s fragile economic recovery, experts have warned.

A person earning £ 30,000 will see their take-home pay drop by £ 1,660 due to soaring cost of living, stagnant wages and tax increases, according to new calculations by the Institute for Fiscal Studies (IFS) .

The actual pay cut includes the payment of an additional £ 250 in national insurance contributions and an additional £ 150 in income tax. Poorer households, who spend more of their income on essentials like energy, will be even more affected, and hundreds of thousands of people are expected to fall into fuel poverty. Someone earning £ 15,000 a year will have an impact of £ 860 on their actual after-tax income, the IFS has calculated.

This means that households are now facing the largest sustained reduction in their disposable income since the 1970s.

Citizens Advice warned people were being forced to make “desperate decisions” between eating or heating their homes. “With further price hikes hit in April, things are set to go from bad to worse,” said the organization’s chief policy officer, Morgan Wild.

Budgets are expected to be brutalized by a 50% increase in energy bills in April when a revised level of price caps is applied, while households that benefited from cheaper fixed tariffs will see their bills double.

£ 1,660

Reduction in take-home pay for someone earning £ 30,000 per year

Alarming spikes in gas and electricity costs, combined with a global disruption in supply chains, are pushing up prices for a multitude of products, with inflation set to exceed 6%.

It comes at the same time as an increase in National Insurance Contributions (NICs) and the start of an £ 11 billion income tax raid by Rishi Sunak.

The government has been accused of making the cost of living catastrophe worse by introducing ill-conceived tax hikes when inflation rises and wages stagnate.

Economists have warned that Mr Sunak’s desire to “balance the books” by raising taxes when the economy is weak risked stifling the UK’s fragile recovery, which in turn would lead to lower prices. tax revenues.

“There is a real risk that ill-conceived tax hikes combined with weaker economic growth turn out to be a dangerous combination for household budgets and the country’s finances,” said George Dibb, director of the Center for Economic Justice of the IPPR.

“The UK is facing a sustained cost-of-living crisis where incomes could be hit even harder than the financial crash of 2008. If this turns out to be the case, you have to go back to the 1970s to find a shock worse for households’ real disposable income.

A five-year freeze on income tax cuts announced by Rishi Sunak in October means an additional 1.5 million low-income people are expected to be covered by the basic income tax rate and 1.2 million people driven to the higher rate. Higher inflation means people will pay £ 4 billion more in income tax by 2026 than the Treasury expected, according to a new analysis from the IFS.

The tax hikes will reduce household incomes and consumer demand, hampering economic growth, said IFS deputy director Carl Emmerson.

“The fact that inflation is much higher than expected last March also means that the freeze on income tax cuts will be more severe. “

1.2 million

More low-income people will pay income tax starting this year

Living standards are further eroded by soaring house price inflation, fueled in part by a cut in stamp duties last year. Despite a lackluster economy, average UK house prices soared 9.8% in 2021, making homeownership less affordable for those not yet on the ladder.

The disastrous set of data means less money to spend on households, less income for businesses recovering from the pandemic, and potentially lower tax revenues for the government.

The Chancellor faces increasing pressure from backbench MPs and Tory activists to do an about-face on his planned tax increases, but he has remained firm so far, insisting on the fact that they are the only responsible means of paying for health and social care.

Households were already approaching the current crisis in a financially vulnerable position due to 13 years of no real increase in average incomes, said Frank van Lerven of the New Economics Foundation.

According to the NEF, some 21.4 million people live below a socially acceptable standard of living. The think tank does not expect real wages to return to their 2008 level until the end of 2028.


The year in which average real earnings are expected to return to their peak in 2008

Mr van Lerven said: “A host of different dynamics will hit all households at the same time – a new wave of coronavirus, declining real wages and huge increases in energy prices.

“Besides that, we still have not recovered from the previous crisis and we are still grappling with the consequences of leaving the European Union.”

The NEF is calling for, among other measures, a reduction in the level of energy price caps for low-income people, an extension of the hot house rebate to apply to more people and an increase family allowances.

Talks between the government and energy providers have yet to come to an agreement on how to mitigate the impact of rising bills.



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