Rishi Sunak has warned the country is facing â€œchallenging and uncertainâ€ times after official forecasters predicted the biggest fall in living standards on record.
ollowing his spring statement on Wednesday, the Chancellor insisted the Government was â€œon the side of hard-working familiesâ€.
But Labour said that he had done nothing to tackle the cost-of-living crisis facing households up and down the country.
In his Commons statement, Mr Sunak announced a 5p cut in fuel duty and an increase in the threshold at which people pay national insurance contributions.
Appearing on an LBC radio phone-in on Wednesday evening, Mr Sunak said 70% of people would be better off as a result â€“ despite an impending increase in national insurance rates to pay for the NHS and social care.
â€œWe have got some uncertain and challenging times ahead,â€ he said.
â€œThis Government is on the side of hard-working British families and we will get through these next challenges together.â€
With the war in Ukraine forcing the Office for Budget Responsibility (OBR) to sharply downgrade its forecasts for growth, his deputy, Simon Clarke, denied the country was heading for â€œausterity 2.0â€.
However, he warned public sector workers could not expect pay rises to keep up with rising inflation, which the OBR is predicting will hit a 40-year high before the end of the year.
â€œWe are not freezing public sector pay,â€ Mr Clarke told ITVâ€™s Peston programme.
â€œThere will be pay increases, but we are not in position where we can start paying out eight, 10, 12%. It would be wildly unrealistic to expect us to do that.â€
Mr Clarke also gave a clear signal ministers intend to issue more licences for North Sea oil and gas production as Europe seeks to move away from reliance on supplies from Russia.
â€œWe are determined to unlock more production in the North Sea,â€ he told BBC2â€™s Newsnight.
For Labour, shadow chancellor Rachel Reeves said the Government had done nothing to address the immediate crisis and she called on ministers to scrap VAT on domestic energy bills.
â€œThe key thing is to get a grip of inflation,â€ she told the Peston programme.
â€œWhy are workers on the public and the private sector asking for higher pay? We need to tackle that inflation.â€
The OBR downgraded growth in gross domestic product â€“ a measure of the size of the economy â€“ from the 6% forecast for this year at the time of the Budget in October to 3.8%.
Inflation is forecast to hit 8.7% in the fourth quarter of 2022 and to average 7.4% over the year, with wages failing to keep pace with rising prices.
The OBR said higher prices â€“ combined with rising taxes â€“ will â€œweigh heavily on living standards in the coming 12 monthsâ€.
Despite a Â£6 billion cut in national insurance and a previously announced Â£9 billion package to help with energy bills, â€œreal household disposable incomes per person will fall by 2.2% in 2022-23â€, the biggest hit in a single year since records began in 1956-57.
It’s hard to overstate the scale of the cost of living crisis coming. And yet against that backdrop the Chancellor has chosen to focus on re-building his tax cutting credentials over providing support for low-and-middle income households, says RF’s @TorstenBell pic.twitter.com/Np21GCsaUm
â€” Resolution Foundation (@resfoundation) March 23, 2022
The cost-of-living crisis, driven by fuel and energy prices which were rising even before Vladimir Putinâ€™s invasion of Ukraine, will be exacerbated in April by the 1.25 percentage point hike in national insurance to fund the NHS and social care.
But Mr Sunak unveiled a plan to increase the threshold at which people start paying national insurance contributions (NICs) by Â£3,000 to Â£12,570 from July, benefitting around 30 million workers with a tax cut worth more than Â£330.
He promised further support in 2024 with a pledge to cut the basic rate of income tax from 20p in the pound to 19p â€“ â€œa Â£5 billion tax cut for over 30 million peopleâ€.
Paul Johnson, director of the Institute for Fiscal Studies, said the Chancellorâ€™s refusal to revise his spending plans would mean less money in real terms for public services due to the impact of inflation.
He said there was little help for â€œthe very poorestâ€ in society who rely on benefits.
â€œTheir benefits will rise by just 3.1% for the coming financial year. Their cost of living could well rise by 10%,â€ he said.
Torsten Bell, chief executive of the Resolution Foundation living standards think tank, said the measures set out by the the Chancellor were â€œbadly designedâ€ with almost no new support for the poorest households.
â€œIt makes no sense to raise national insurance while cutting income tax â€“ 21st century Britain doesnâ€™t need to do more to make things harder for workers, and easier for landlords,â€ he said.
However, Mr Clarke insisted the Government had limited room to manoeuvre and that the additional â€œheadroomâ€ in the Chancellorâ€™s spending plans could quickly disappear.
â€œWe have to be really conscious of the volatility of the situation,â€ he told the Peston programme.
â€œWe have very little margin for error here. Roughly a 1.3% increase in the cost of borrowing could wipe out all of that headroom.â€