With cost of living rising rapidly, the Bank of England increasing interest rates and National Insurance going up, more eyes than usual will be on Chancellor Rishi Sunak as he presents his Spring Statement on Wednesday.
Two of the biggest drivers of rising living costs, or at least the ones receiving the most media attention, are the hefty increases in energy prices and fuel. The Ofgem energy price cap is due to increase by 54% in April, with many households already experiencing huge increases in their monthly bills. Petrol and Diesel prices have also been increasing rapidly, with some prices at the pump exceeding £2 per litre. These increases are, at least partly, as a result of the ongoing situation in Ukraine, which is raising concerns about oil production and supply from Russia.
The end result is that increasing prices are hitting us in places where it’s very obvious. We see the figure on the pump every time we fill up. We see the statement from our energy supplier every month and it is one of largest household costs outside of rent or a mortgage.
So what is Rishi Sunak planning to do about it?
Cut to fuel duty
One option that has been raised is for the Chancellor to announce a cut to the level of fuel duty on a litre of petrol or diesel. The current level of fuel duty for petrol, diesel, biodiesel and bioethanol is set at 57.95 pence per litre. What this means is that at £1.70 per litre, fuel duty (or tax) makes up over 30% of the total price you pay to fill up.
Rishi Sunak as hinted that he may be considering cutting this rate of duty by 5p per litre. Whilst this represents a reduction in duty of 8.6%, it’s unlikely to make much of a difference to motorists. On an average tank of fuel, it would only reduce the cost to fill up by around £2. Tinkering at this level isn’t likely to make a significant difference to most household budgets.
National Insurance threshold increase
National Insurance contributions are set to rise in April. For most, this means contribution levels will increase from 12% to 13.5%. The increase is in the form of what is known as the Social Care Levy, and it’s been brought about to increase funding to the NHS and to provide specific funding for health and social care.
With advances in medicine, an ageing population and life expectancy increasing almost every year, the costs of providing social care such as care homes and disability care is increasing all the time. This is putting significant strain on the public sector, in an area that already makes up the largest line item of regular government expenditure.
With this in mind, the Chancellor has expressed strong resistance to walking back this proposed increase. He is however, believe to be considering raising the minimum threshold from which National Insurance contributions are payable, which reduce the burden on the lowest earning individuals. Currently, National Insurance contributions are payable once an employee is earning over £184 per week.
No major announcements expected
Both of these measures are unlikely to make a drastic difference to most households. With the controversial £200 energy bill assistance package already announced, most commentators are not expecting any further help in regards to rising energy costs.
The unfortunate truth of the matter is that the Chancellor has somewhat limited options. Coming off the back of the biggest public assistance packages the UK has ever seen in the Coronavirus Support Package, Rishi Sunak needs to tread the line of offering support, whilst being mindful of the broader impact on the public purse.
After all, increased government assistance may provide some short term relief to household budgets, but it could also pour fuel on the fire of record high inflation. All in all, we expect to see a fairly minor response from the government in the Spring Statement, with an expectation (or a prayer) that things will have improved by the Autumn.
By Jason Mountford, Financial Planning Expert at Irwin Mitchell