Rishi Sunak succumbed to months of pressure on the cost of living crisis with a £ 15bn support package, partly funded by the execution of a notable U-turn to impose an extraordinary tax on businesses energy.
Announcing the measures on Thursday, in a strong week for the government, the chancellor said his “significant set of interventions” would help the poorest in society, with a single payment of £ 650 for 8 million families in benefits according to resources, plus an additional £ 200 for all payers of unpaid energy bills.
After months of rejecting Labor calls for an extra tax on energy giants, Sunak announced what it called a “temporary target energy profit tax” that is expected to raise £ 5 billion.
He was forced to deny that the package had been submitted to generate positive headlines after Sue Gray’s final report exposed the culture of alcohol-fueled parties on Downing Street. “I can categorically assure you that this had nothing to do with time,” he said.
Thursday’s announcement was far more ambitious than expected, and was widely welcomed by charities and the influential Institute for Tax Studies, which described it as a “really big support package.”
Critics have warned, however, that the measures are still only equivalent to a “sticky plaster” that could not cope with long-term pressure on households and would need to be updated if the cost of living emergency does not is reduced next year.
Rachel Reeves, the shadow chancellor, said Sunak’s change of face on the unexpected tax showed that Labor was “winning the battle of ideas in Britain”, while arguing that the measure came months too late and was not accompanied by a long-term plan to deal with. with rising living costs.
“It seems that the chancellor has finally realized the problems facing the country,” he said.
“First we asked for an extraordinary tax on oil and gas producers almost five months ago to help families and pensioners in need. Today he announced this policy but he does not dare to say the words. It is a policy that does not dare to say his name ”.
Asda President Stuart Rose warned that the measures were still just a “drop in the ocean” in terms of the pressures facing families.
“I can remember the last time it was inflation [like this] and it took almost eight years to achieve this [it] under control, “Lord Rose said.
After weeks of ministers, including Boris Johnson, saying they were not in favor of a special tax, Sunak told lawmakers that the extraordinary profits of oil and gas companies should now be taxed to help to alleviate the cost of emergency life.
He insisted that the energy tax, which he refused to call an extraordinary tax, was designed not to deter investment, with a 90% tax cut for companies investing in oil and gas extraction.
However, BP warned that it would now revise its plans in light of the tax, which will be maintained for up to three years, although the Treasury said it would be phased out when oil prices return to historic levels. normal.
BP said in a statement: “Today’s announcement is not for a single tax, but for a multi-year proposal. Naturally, we will now have to look at the impact of both the new tax and the tax cut. in our North Sea investment plans. “
Some Conservative MPs opposed the tax, and Richard Drax accused Sunak of “throwing red meat at the Socialists”, while Craig Mackinlay said: “Higher taxes can never mean lower prices. All in all, I’m disappointed. , embarrassed and horrified that a Conservative chancellor could come with this gut. “
Sunak rejected the idea of being a tax and expense chancellor, but said, “What people want and what I am is to be a pragmatic chancellor, to do the things that I think are right for the county in the short term. and in the long run. ”
Sunak’s third economic package in less than six months doubled support to more than £ 30bn, with an additional payment of £ 300 for pensioners and £ 150 for recipients of disability benefits.
Economists say Sunak is betting on the current high inflation rates to fade next year, despite signs that Russia’s war in Ukraine and China’s zero-covid policy, which causes a disruption to world trade, could put persistent pressure on living costs.
Inflation in Britain soared to 9% in April, the highest level since 1982, driven by rising energy bills, record petrol prices and rising energy costs. a weekly store. The Bank of England expects inflation to reach close to 10% by the end of the year, following a projected £ 800 increase in energy bills to £ 2,800.
Alison Garnham, executive director of the charity Child Poverty Action Group, expressed relief that Sunak was finally waking up on the scale of the crisis for ordinary families, but warned the chancellor that “he was joking if thinks the problem is temporary “.
“If the chancellor is taken seriously when it comes to supporting those who are struggling, he will have to make long-term changes to the structure of the social security system and restore the value of benefits to something they can really do. living families, “he said.
After a decade of austerity, the real value of profits has fallen to its lowest level in four decades. While Sunak promised that profits would rise next spring with this September’s inflation rate, which was expected to boost billions of pounds for the poorest families, charities warned that the general safety net was exhausted.
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Despite criticism that it took longer than necessary, leading economists said the updated government plan was a marked improvement over Sunak’s two previous attempts, which were widely criticized for not helping the poorest in society.
The Resolution Foundation said twice as much as the £ 15bn fresh support package would go to poorer households than to wealthier families, with an average profit for those with lower incomes of around £ 823. compared to the £ 296 of the richest.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said the intervention was well-targeted to address the cost-of-living shock of rising energy bills. “This is very redistributive: take from the big income and give to the poor,” he said.
Along with the three support packages announced by Sunak this year, Britain’s poorest 8 million households are expected to be fully offset by rising cost of energy bills, with aid worth 1,200 £ on average.
City economists have warned that the chancellor, who offered £ 400 in support to even the richest bill payers (£ 200 announced in February, now unpaid, plus the extra £ 200) runs the risk. to feed already high inflation rates.
“The consequence of relieving pain now may be worse pain later on,” said Kallum Pickering, Berenberg’s senior economist.
With the task of keeping inflation low and stable while supporting jobs and growth, Threadneedle Street has increased the cost of borrowing four times this year to its highest level since after the 2008 financial crisis. analysts said the bank would now be forced to raise rates even further.