Rishi Sunak must choose to either borrow billions more or allow households to suffer an income squeeze that could be the worst since the 1970s, a leading think tank has warned.
The Institute for Fiscal Studies said the likely impact of the Ukraine crisis on inflation and public finances could force the chancellor to act when he delivers his spring statement later this month.
Without more spending to reflect the deteriorating cost-of-living outlook, public sector workers face deep pay cuts in real terms and energy bill payers will be hundreds of pounds worse off, a said the IFS.
Britain was already facing a squeeze on inflation even before Russia invaded Ukraine, with the rate of price increases at its highest level in three decades predicted by the Bank of England at 7%.
Now an increase of oil and gas prices created by the conflict threatens to add to already spiraling energy bills and fuel costs, contributing to further inflation.
Experts now believe it will exceed 8% – meaning that, with wage growth not keeping pace, workers will see their incomes fall even further in real terms.
It leaves the Chancellor facing a “huge call for judgement” with the pressure on households “greater than at any time since at least the financial crisis and most likely since the 1970s”, the IFS said.
Rising inflation will wipe out at least a quarter of the real increases in public services announced in October, the think tank calculated.
This means public sector workers face an average pay cut in real terms of £1,750, adding to the impact of restricted pay deals for many of them, including teachers, over the past decade, according to the report.
But making up the shortfall would cost the Treasury £10 billion.
Even a 5% below inflation pay rise would result in a big bill – £4billion for the NHS and £1.75billion for schools – while eating up large chunks of planned budget increases.
Meanwhile, inflation has dampened the impact of Mr Sunak’s package of measures announced last month to help households cope with rising energy bills.
Costing £9billion, the measures are expected to offset around half of the total £18billion rise in household bills, the IFS said.
But rising energy bills since that time means bills will instead be £43billion higher, meaning Mr Sunak would have to incur an extra £12.5billion to have the same type of utility. ‘impact.
The IFS said that before the last gas and oil price spike, a worker with an average salary of £27,500 would have already been £500 worse off in real terms this coming year due to the increase in bills.
They are now likely to be £800 worse off, based on Citi experts’ predictions, the think tank said.
This could mean that the Chancellor will have to consider whether to pursue an increasingly costly blanket approach of giving lump sum payments to all households, or moving to targeted support for those least able to do so. face, according to the report.
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IFS director Paul Johnson said: “Rishi Sunak has to make a huge judgment call.
“Will it do more to protect households from the effects of energy prices which have risen again over the past two weeks?
“If he doesn’t, many middle-income people will be hit hardest by their standard of living since at least the financial crisis.
“If he does, then there will be another blow to public finances.
“Although he had no choice between major state action during the pandemic, his response to this crisis will tell us more about how he sees the limits of government in protecting citizens against shocks. external forces.”
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