As the Spring Statement approaches at the end of March, Chancellor Rishi Sunak is left in a predicament much like the one he faced two years ago.
But as he shakes off the title of Covid Chancellor, Sunak is faced with fighting an economic war with much more constrained funds than in 2020.
Expectations were that Sunak would begin to make up for historic borrowing during Covid, with a planned lift to National Insurance now appearing outdated as UK workers pay a de facto tax on transport and heating, with oil prices surging to 14-year highs.
The Government plans to raise National Insurance by 1.25 percentage points, a plan which received extensive backbench opposition even before the onset of huge inflation and Russia’s invasion.
Unleaded petrol was at a fresh record of 156.36p a litre yesterday, while fuel cap uplifts will increase the price of energy in UK homes rise by 54% from April, as inflation expectations top 8%.
Kallum Pickering, senior economist at Berenberg bank, sees the Chancellor facing pressure to stimulate both demand and supply channels.
“You might argue that since part of the additional inflation is coming as a result of western sanctions, if you want to keep up support for those sanctions you may want to lighten the impact of higher energy on households," Pickering said.
"There are likely to be calls to scrap the National Insurance rise or maybe even put cash in household's pockets, but for an economy that's suffering an inflation problem you need to be very, very cautious of adding demand.”
Pickering suggested the Chancellor may alternatively focus on the supply-side, subsidising energy suppliers in the UK before trying to recoup money over time once prices are normalised.
Despite a tail-risk of a heavy supply-side crisis from continued sanctions leading to stagflation, Pickering said data on hiring, investing and production look positive enough to ensure this would be temporary.
But with public sector net borrowing last year at its highest rate since the end of the Second World War, and debt at near 60-year highs, the UK is scarcely able to ramp up relief spending without continuing to feel the pinch on prices.
Pickering, though, said there was "no good economic argument" to increase taxation to combat inflation, with the cost of borrowing falling again.
"You can see the way the market has reacted to the Russian invasion of Ukraine. Bond yields have come down, so in real terms it has gotten much cheaper for the UK to borrow", he said.
Ruth Gregory, senior economist at Capital Economics, thinks the Chancellor is likely to have the fiscal space to cushion the hit to households' real incomes, given his fiscal rules don't kick in for another three years.
"The Chancellor banked £17.5bn in headroom in the October Budget," said Gregory.
"So it seems likely that the Chancellor would still meet his fiscal rules if he put in place a package to offset the possible £13bn fall in the level of real household disposable incomes in 2023 in our central forecast."
Pickering also expects an increase to the UK's defence budget, following Germany’s pledge to raise defence spending above the NATO minimum of 2% of GDP, and Berenberg's prediction that US defence spending would rise more than 8% this year.
“Military spending is likely to go up, there will be some sort of buffer for energy prices, but that won’t be significant at least in the near term.”