In Britain, the economic shockwaves from the war in ukraine they are exacerbating shrinking family budgets and raising fears of a cost-of-living crisis. The British government announced some measures on Wednesday to help people cope with rising prices, which are at their highest level in three decades, including cutting petrol prices.
But the plan, which called for some tax cuts and extra benefits for low-income people, was met with criticism from opposition analysts and lawmakers, who pointed to Britain’s deepening economic problems.
Rishi Sunak, the finance minister, said sanctions on the government of President Vladimir V. Putin and efforts to isolate Russia were taking a toll on the British economy. This was felt most acutely 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 the Putin regime are not gratuitous for us at home,” Sunak told lawmakers as he announced an update to the Treasury’s fiscal 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 rise 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 will not fall below the central bank’s target of 2 percent through 2024, he said.
The outlook for household incomes is even bleaker. Taking inflation into account, household disposable income per person will fall 2.2 percent in the next fiscal year that begins in April, the agency said. That would be the largest drop in a single year since official records began in 1956.
Despite the deteriorating economic outlook, Sunak seemed reluctant to deviate too far from his previous spending and tax plans. His speech was the first fiscal announcement from the Treasury since Britain ended its pandemic restrictions, having spent around 311 billion pounds ($410 billion) on its response to the virus for health services, companies and workers. Mr. Sunak has repeatedly declared the need to repair public finances, temporarily increase taxes and reduce public spending.
The interventions announced on Wednesday were limited. For a year, the government will cut taxes on petrol and diesel by 5p a litre, which it says will save the average driver around £2 a week. Local authorities will get a further £500m to support low-income households. And the biggest announcement of the day was an increase in the income threshold that workers must meet before paying out National Insurance, a broad tax that funds state pensions and some benefits.
“The fuel tax cut, while very welcome, is just a drop in the ocean compared to the larger tsunami of rising costs that is hitting businesses and households,” said Shevaun Haviland, CEO of the British Chambers of Commerce, in a statement.
Before Wednesday’s announcements, expectations had been raised that Sunak would take bolder action. The data showed that borrowing was lower than previously forecast, leading some economists to conclude that the Treasury had room to spend more. Others, pointing to rising prices, said the government should scrap its plan to increase National Insurance for employers and workers next month, to ease the backlog in the National Health Service and fund social care for adults.
The government sticks to this plan.
“What really stands out today is what was missing,” Paul Johnson, 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 poorest, apart from a small amount of extra money for local authorities to dispense at his discretion,” he said.
For months, campaigners have warned that low-income people and those on British government benefits were already too depleted by higher energy bills, petrol prices and food costs. Households had begun to reduce spending by turning off the heating. for longer periods of the day during the winter or give up takeout meals, for example. Next month, the price cap on energy bills for millions of homes will go up 54 percentor about £700, due to natural gas wholesale price increases last year.
The Russo-Ukrainian War and the Global Economy
Sunak has been under intense pressure to cushion the impact of price increases and in February the Treasury said it would spend around £9bn to give most households up to £350 off their bills this year. in the form of loans and taxes. refunds But the situation has become more serious since then. Inflation is expected to peak at nearly 9 percent in the fourth quarter, the Office for Budget Responsibility said, as energy bills rise again when the price cap is reinstated in October.
On Wednesday, Sunak said it would remove 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 hit Britain and has been characterized by crisis management. His unprecedented plan to pay up to 80 percent of millions of people’s salaries when the economy crashed in March 2020 made him incredibly popular. And there were other generous grant and loan programs for businesses. But over time, his efforts to cut vast pandemic-era public spending have resulted in policy changes and a drop in popularity.
In October, looking towards the end of the pandemic, presented his plan for an “economy fit for a new age of optimism,” proposing big spending plans to improve education, the National Health Service and job skills. However, the Office for Budget Responsibility warned that post-Brexit labor shortages, slowing trade, supply chain disruptions and rising energy bills would weigh on economic growth.
In a speech last month, Sunak said he wanted to build a “new business culture” and an economy centered on “free market principles.” In this view, more government spending is not the answer to fixing Britain’s lackluster productivity growth. Private business investment was paramount.
But Britain and mainland Europe have emerged from one crisis and quickly found themselves in the middle of another, with businesses calling for more government support. Russia, a major producer of raw materials, is being economically isolated, and British and European Union leaders have announced plans to make their economies independent of Russian oil and gasa transition that is likely to lead to higher energy prices in the short term, more inflation in general, and difficult political decisions.