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Cost-of-living support not targeting benefits claimants, OBR warns Chancellor

The Office for Budget Responsibility told MPs that Rishi Sunak’s support mainly helped those in work instead.

28 March 2022

The poorest in society are less likely to enjoy the benefits announced in the spring statement last week because the support packages focused so heavily on those in work, according to the Government’s own economists.

Officials from the Office for Budget Responsibility (OBR) also told MPs that the Retail Price Index (RPI) of inflation – which influences train tickets, broadband bills and mobile phone tariffs – could soar above 10%.

They also said the price of fuel could rise 6% next year once the 5p-a-litre cut in fuel duty comes to an end next year.

Richard Hughes, OBR
Richard Hughes, chairman of the OBR, answers questions about the spring statement (ParliamentTV/PA)

Answering questions from the Treasury Select Committee as part of their inquiry into the spring statement, the officials also said the Government’s attempts at boosting business investment had fallen short due to continued uncertainty in the economy.

OBR chairman Richard Hughes was asked a wide range of questions about the spring statement, in particular whether it would benefit the poorest people in the country.

He said: “The Chancellor has used a combination of the council tax systems, supporting energy bills and the tax system to deliver support and relief for people facing this cost-of-living squeeze, rather than the benefits system.

“One of the limitations of that is that you are limited by how many people you can reach through the tax system.

“If people aren’t in work, or working the number of hours they need to get them beyond the personal allowances and thresholds, they are more difficult to reach through the tax system than they would be through something like universal credit, which reaches people lower down the income scale.”

Angela Eagle
Angela Eagle asked the OBR whether the Chancellor is a ‘tax cutting’ one (ParliamentTV/PA)

Chancellor Rishi Sunak raised the national insurance tax threshold and reconfirmed that households will receive a rebate on their energy bills which will need to be repaid at a later date.

He also announced a 1p cut to the basic rate of income tax by 2024.

Labour MP Angela Eagle asked Mr Hughes: “For those who are on lower fixed incomes, they are getting less help than those who are earning enough to pay national insurance in the first place?”

He said: “Yes, that’s right.

“We do expect people who are working to offset some of the inflationary pressure.

“The issue is with people on benefits – they are feeling more of a squeeze than people who are managing to get some of their income from earnings.”

The OBR said it was particularly concerned with inflation, which they now predict will hit 7.5% by the autumn.

Budget Responsibility Committee member Professor David Miles said: “I suspect there will be very few people who don’t feel a very real cut in their standard of living.

“Inflation that we thought until recently would be 3% or 3.5%, is going to be 7.5%. It could be 9% in the autumn.”

He added that the retail price index measure of inflation could be even higher.

Prof Miles said: “That will rise by more. It’s very likely to be 10% or slightly more than 10% this year and very few people will see their after-tax earnings rising by anything like the same amount so, across the board, everyone will lose.”

The OBR’s job is to make predictions on the impact of policy changes announced by the Government in an official capacity.

Asked whether the Chancellor can claim to be a “tax cutting” one, the panel pointed out that for every £6 of tax increases, Mr Sunak has given £1 back in cuts since becoming chancellor.

One major cut Mr Sunak made was a 5p-a-litre reduction in fuel duty, although this is only temporary and will increase by 6% next year once it ends,  the OBR said.

To keep it in place would cost the Treasury £3.6 billion, it added.

Other questions included the impact of Brexit, with the OBR pointing out that its previous predictions are being played out, particularly with levels of imports and exports between the UK and EU remaining about 15% below pre-Brexit levels.

The OBR bosses said it was too early to say what long-term impact the Ukrainian conflict with Russia will have on the UK economy, due to the uncertainty.

Mr Hughes said: “We haven’t for the moment assumed any long-term impact on productivity or potential output for the UK from this energy price shock because we’re assuming, as markets do, that it does resolve itself and we can absorb the higher long-term costs of energy prices through domestic adjustments.”

Questions were also raised about Government support for businesses, particularly the super-deduction announced to encourage investment by UK firms.

However, the OBR experts suggested it had not had the impact the Government was hoping it would.

Prof Miles said: “Capital spending seems to have been held back quite a bit. Uncertainty for them (businesses) is a lot higher than we thought back in October.”

Mr Hughes added: “If you unleash a new piece of equipment on an unsuspecting workforce they’re going to struggle to make good use of it.

“Empirical evidence shows that investment is higher in countries which have higher workforce skills levels because they’re able to actually use it productively and one of the things we’ve suffered from in the UK is having relatively lower levels of workforce skills so you don’t get the returns from complex kit because they don’t know how to use it.”

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