Pensioners will see their incomes rise by up to 8 per cent next year, the Government has promised with the pensions triple lock set to be reinstated.
Rishi Sunak is finalising a package of support measures including tax cuts to be announced in the Spring Statement on Wednesday, funded by a public finances windfall of up to £50bn.
He is also expected to announce policies designed to grow the economy in the long term by giving tax breaks to firms that reinvest their profits productively.
Pensioners are among the groups which face a significant real-term cut to their living conditions in the next year as inflation far outstrips costs. The triple lock which determines that the state pension should rise by the higher of inflation, average earnings and 2.5 per cent has been suspended, meaning the payment will go up by just 3.1 per cent next month even as CPI inflation stands at 5.5 per cent.
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Soaring prices, expected to top out at around 8 per cent inflation later this year, had stoked speculation the triple lock could be suspended for another year.
But the Prime Minister’s official spokesman said: “We have made clear that it was a temporary pause. No one can predict what inflationary pressures will be, but certainly, there is no change to the commitment we have made.” That suggests the state pension will rise in line with inflation in April 2023.
The Chancellor is under intense pressure to introduce new measures to ease the cost of living after the war in Ukraine drove oil and gas prices significantly higher and threatened hikes in the cost of food.
He is widely expected to cut fuel duty by up to 5p per litre and may also remove VAT from domestic energy bills. Labour is calling for the package to be partly funded by a windfall tax on the profits of oil and gas companies which have benefited from the rise in the global market price of fossil fuels.
Mr Sunak has insisted he will not scrap the controversial rise in national insurance which takes effect in April and is also understood to be resisting calls for a large increase in public spending, including on defence.
Goldman Sachs has estimated that borrowing this year is likely to be between £20bn and £50bn lower than originally forecast, giving the Chancellor the opportunity to cut taxes or hike spending without breaching his own rules on the size of the deficit and public debt.
As well as tax cuts, such as raising the threshold at which lower earners start to pay national insurance, Mr Sunak has been weighing up ways to boost economic growth over the next few years after repeatedly saying that the best way to ease the cost of living is to increase real incomes.
He may extend temporary schemes allowing firms to claim corporation tax breaks for more of their investments, which are designed to encourage companies to put their income to the most productive use possible.
