Rishi Sunak attempted to assert his credentials as a tax-cutting chancellor yesterday as official forecasts showed Britain facing the biggest fall in living standards since records began in 1956.

The chancellor used his spring statement to cut fuel duty by 5p a litre and announce that the threshold at which people start paying national insurance would rise from £9,568 to £12,750 in July. He pledged to lower the basic rate of income tax from 20p to 19p in 2024.

However, he held back most of a potential £20 billion-a-year war chest for pre-election tax cuts, choosing instead to proceed with plans to raise national insurance next month despite a backlash from Conservative MPs.

The Office for Budget Responsibility (OBR), the government’s fiscal watchdog, said that the chancellor’s tax cuts would offset only about a quarter of the tax rises announced in the budget last October. It said living standards would fall by 2.2 per cent in the next tax year, the largest reduction in a year and twice the size of the falls experienced during the oil shocks of the 1970s and 1980s.

• Spring statement highlights: a summary of the key points

The OBR said the fuel duty cut and changes to the national insurance threshold would offset a third of the fall in living standards expected in the next year. It said that despite the tax cuts announced by Sunak, the overall tax burden would rise to 36.3 per cent in 2026-27, the highest level since the 1940s. This is because of a previous decision to freeze income tax thresholds, which will drag one million workers into paying the higher rate, alongside other tax rises. Inflation could rise by as much as 8.7 per cent by the end of the year.

Tory ministers and MPs are increasingly concerned about the scale of the cost-of-living crisis facing the nation.

At cabinet yesterday Sunak was told by Kit Malthouse, the policing minister, and Jacob Rees-Mogg, the minister for Brexit opportunities, to cut public spending because of its impact on inflation. Sunak said he understood their concerns but the government was committed to its manifesto pledges. He instead emphasised the need to avoid waste.

The chancellor was challenged by Tories at a meeting of the 1922 Committee of backbenchers last night to bring forward income tax cuts and increase defence spending. Sunak said borrowing was too high and that the UK already had the biggest defence budget in Europe.

Last night he told broadcasters: “We are facing the same challenges that many countries around the world are facing — that’s rising prices and high inflation. I can’t protect everyone against the full impact of those global challenges, but where we can make a difference, of course we will and that’s why the policies announced today are a significant intervention. They will put billions of pounds back in the pockets of hard-working British families.”

In The Times, Paul Johnson, head of the Institute for Fiscal Studies, writes that he has “sympathy” for Sunak given that “we have been hit by world events way outside our control”. He warns: “We will be poorer than we expected.”

However, he criticises Sunak’s decision to raise taxes on workers at the expense of pensioners and investors, and not to help those on benefits to deal with the rising cost of living. “Sunak had difficult choices to make for sure. The choices he made, though, were not the only ones open to him,” he writes.

The most significant measure was Sunak’s decision to raise the rate at which workers start to pay national insurance. The Treasury said that this would lead to a tax cut for nearly 30 million people and 2.2 million would be taken out of paying the contributions. This, it said, would save a typical employee more than £330 in the year from July. It will cost £6 billion, almost half the amount the Treasury will raise by increasing national insurance by 1.25 percentage points.

The planned 1 per cent cut in the basic rate of tax in 2024 would be worth £175 on average for 30 million people and be the first such cut in 16 years. The 5p cut in the rate of fuel duty is due to last until next March but ministers believe it is likely to become permanent.

Sunak also abolished VAT on green home improvements and doubled to £1 billion a fund that provides grants for households to pay for food and utilities.

The OBR revealed that he expects an extra £33 billion over the next five years after freezing the level at which graduates begin repaying student loans.

Torsten Bell, chief executive of the Resolution Foundation think tank, said that Sunak had spent a “fiscal windfall” on “burnishing his credentials as a tax cutter” rather than on “prioritising help for low and middle-income households”

Sunak claimed it was the biggest net cut to personal taxes for a quarter of a century

HOUSE OF COMMONS/PA

The pandemic has dramatically increased the pay of Britain’s highest earners while cutting the incomes of the poorest, the OBR said. Average pay for those who earn below the personal allowance has fallen 10.3 per cent over the past two years, and pay for basic rate taxpayers has risen by just 4.4 per cent. But pay among higher-rate taxpayers has risen by 21 per cent, and among additional-rate taxpayers has risen by 23.3 per cent.

The OBR said that the “differences in pay growth” during the pandemic “reflect its differential impact across sectors of the economy. The pandemic hit employment and output in some sectors much harder than others, while the recovery has also been uneven. Some sectors have performed particularly well either because they could easily switch to remote working ... the sectors that have fared worst in terms of aggregate pay growth were also those where effective tax rates and amounts of tax paid are relatively low”.

Sunak was aided by a faster economic recovery from coronavirus than had been predicted. “The public finances have continued to recover from the pandemic more quickly than we expected,” the OBR said. Tax receipts this year have been revised up by 4 per cent “thanks to strong growth in tax paid by higher earners and by companies.”

Despite the impact of higher inflation on debt interest costs, borrowing is set to halve between 2020-21 and 2021-22, the OBR said, giving Sunak a boost of £55 billion compared to last October’s forecast.