The UK Chancellor may need to spend and borrow billions more to avoid the worst financial crisis since potentially the 1970s, according to a leading UK think tank.
The Institute for Fiscal Studies (IFS) said Rishi Sunak could need to find more than £12bn to fight higher prices, on top of £9bn already committed as the Ukraine War spills into already-spiralling energy prices.
The report suggested higher inflation would wipe out a quarter of real terms increases to public spending, while rising energy prices following the Russian invasion of Ukraine could cause a £43bn hit to households.
IFS Director Paul Johnson said the Chancellor had to decide on whether to protect households from the effects of skyrocketing energy prices at the Spring Statement on 23 March.
“If he doesn’t then many on moderate incomes will face the biggest hit to their living standards since at least the financial crisis. If he does, then there will be another big hit to the public finances,” Johnson said.
“While he had little choice over big state action through the pandemic, his response to this crisis will tell us more about how he sees the limits of government in protecting citizens from buffeting by external forces.
The IFS suggested the UK government would need to increase spending and borrowing if it wants to prevent a massive household income squeeze, moderate falling public sector pay and commit more money to defence spending.
“A top up to the budget for defence spending in the coming year – given rising energy costs and Russia’s invasion of Ukraine – seems inevitable,” Johnson said.
“More broadly, the era where Chancellors could use defence spending cuts to enable NHS spending to rise without an overall increase in the size of the state seems well and truly over.”
Rising inflation is expected to add to Government debt, with a quarter tied to the RPI inflation which was 8.5% in January, while rate hikes designed to alleviate rising prices would ramp up debt servicing costs.