Rishi Sunak said the UK faces “significant economic uncertainty” as the ramifications placed on Russia following its invasion of Ukraine continue to feed into prices.
Sunak was commenting after the release of GDP figures for January which showed the economy grew by 0.8%, buoyed by resurgent demand for retail and hospitality and steady construction growth.
But most economists are now downgrading outlooks for the rest of the year as a 50% rise to energy caps is introduced in April and oil shortages begin to feed into price rises, with inflation expected to top 8% this year.
Sunak is left with challenging decisions ahead of the Spring Statement, with the Institute for Fiscal Studies saying the Chancellor could need to borrow and spend up to £12bn to avoid a new financial crisis.
“We have provided unprecedented support throughout the pandemic which has put our economy in a strong position to deal with current cost-of-living challenges,” Sunak said.
“We are continuing to help people where we can, including through over £20 billion of support this financial year and next.
“We know that Russia's invasion of Ukraine is creating significant economic uncertainty and we will continue to monitor its impact on the UK, but it is vital that we stand with the people of Ukraine to uphold our shared values of freedom and democracy and ensure Putin fails,” Sunak said.
Borrowing is expected to increase, with Ruth Gregory, senior economist at Capital Economics, suggesting recent inflation pressures could cause it to overshoot OBR estimates by £30bn.
Berenberg senior economist Kallum Pickering said there was "no good economic argument" to increase taxes to fund extra spending for topping up households' budget and build up the military.
Last week, the British Chamber of Commerce said economic growth would halve this year to 3.6% in the face of cost rises dampening consumer confidence.