UK announces urgent fuel tax cut to fight cost of living crisis

Chancellor of the Exchequer Rishi Sunak leaves 11 Downing Street to announce the Treasury’s one-year spending review in the House of Commons in London, England, on November 25, 2020.

The U.K. Finance Minister announced an immediate cut to fuel taxes and a longer-term tax reduction for workers in a bid to mitigate the country's historic hit to living standards.

In his Spring Statement, Sunak announced that fuel duty will be reduced by 5 pence per liter for a year. The U.K. time is on Wednesday. The government is hoping the cut will reduce the cost of gasoline at the pumps.

The level of fuel duty has been frozen since 2011.

The household support fund will be doubled to 1 billion dollars for those affected by higher energy costs.

Solar pumps, heat pumps and other similar measures will be subject to zero value-added tax, which is a tax on goods and services.

Sunak was under pressure to address the cost of living crisis in the U.K., with households facing record rises in energy bills and inflation running at multi-decade highs.

The UK's inflation came in at 6.2% in February, its highest since March 1992 and well ahead of consensus expectations.

The Bank of England expects inflation to reach 8% in the second quarter, but warns that double-figure prints are not out of the question before the end of the year if Russia's assault on Ukraine continues.

A planned 10% increase to National Insurance (a tax on earnings) kicks in for many workers in April, while at the same time the U.K.'s energy price cap soars, compounding the squeeze on household income as consumer.

Sunak said in his speech that he would be raising the threshold at which workers begin paying national insurance.

He told Parliament that he would cut the basic rate of income tax from 20% to 19% in four years.

Sunak launched a series of multi-billion pound economic support packages, fueled by the country's largest peacetime borrowing levels in history.

Sunak indicated in interviews over the weekend and in his annual Mais lecture last month that he does not wish to continue with ever-expanding fiscal accommodation.

The Office for Budget Responsibility in the U.K. expects the underlying public debt to GDP ratio to be 83.5% in the fiscal year of 2022. The U.K.'s budget deficit is projected to reach 5.4% of GDP in 2021, before falling to 3.9% in 2022, 1.9% in 1993, and 1.3% in 1994.

Sunak warned that the country's debt interest bill will reach 83 billion in the next three years.