Morning Chronicle - UK confronts cost of living crisis with inflation-fighting budget

In a budget update, Chancellor of the Exchequer Sunak unveiled measures to help household finances, including a cut on fuel duty and easing the tax burden for the lowest earners.

Britain's economy will grow far slower than expected this year owing to the Ukraine war and soaring global inflation, he told parliament.

The UK economy was set to grow 3.8 percent in 2022, down from an official estimate of six percent made in October.

- 'Prepare for worse' -

Sunak said that the Office for Budget Responsibility (OBR) -- the government's official economic forecaster -- "has not accounted for the full impacts of the war in Ukraine and we should be prepared for the economy and public finances to worsen, potentially significantly".

"Their initial view, combined with high global inflation and continuing supply chain pressures means" the UK economy is forecast to grow significantly slower than thought.

Gross domestic product was estimated to expand a further 1.8 percent next year, down from an official prediction of 2.1 percent.

The OBR warned that should "wholesale energy prices remain as high as markets expect, energy bills are set to rise... pushing inflation to a 40-year high of 8.7 percent in the fourth quarter".

UK annual inflation accelerated to a 30-year high at 6.2 percent in February, official data showed Wednesday.

Countries across the world are battling surging inflation fuelled by rocketing commodity prices over the Ukraine war and after nations exited pandemic lockdowns.

Sunak last month unveiled a package worth £9 billion ($11.9 billion, 11 billion euros) targeted at helping 28 million poorer and middle-income households with energy bills in particular.

Household incomes are set to shrink further in April owing to a planned tax hike on all UK workers and businesses to fund care for the elderly.

The same month, a cap on domestic gas and electricity bills will be increased, in line with rebounding wholesale energy costs.

"Higher inflation will erode real incomes and consumption," the OBR said Wednesday.

It said that "with inflation outpacing growth in nominal earnings and net taxes due to rise in April", real living standards are set to fall by a record amount this year.

- Rate hikes -

Spiking global inflation has forced central banks around the world to lift interest rates, including the Bank of England which last week lifted borrowing costs to 0.75 percent.

Rising interest rates are significantly increasing governments' debt repayments, which ballooned over the past two years on vast pandemic costs.

Britain's economy rebounded by a record 7.5-percent last year on easing Covid curbs after a pandemic-driven collapse.

The record UK expansion followed an all-time slump of 9.4 percent in 2020.

Sunak has also been comforted by news that the UK unemployment rate has fallen to its pre-pandemic level.

However, rising wages are being eroded at the fastest pace in eight years as inflation soars.

A.Smith--MC-UK