UK Finance Minister Rishi Sunak faces a choice between spending rises or allowing a massive slump in living standards as inflation, runaway energy prices and the war in Ukraine hit households, a respected think tank said on Thursday.
Sunak, who is preparing his Spring financial statement for March 23, is under growing pressure to alleviate pressure on workers who also face a manifesto-busting tax rise tax rise next month.
The Institute for Fiscal Studies said mitigating the impact on wages since Sunak’s last budget plan in October would cost £10bn.
Another £12bn would be needed to restore the level of support for households facing a jump in domestic energy bills that Sunak announced last month.
The finance minister had hoped to cut public borrowing to £83bn in the 2022/23 fiscal year, less than half of borrowing in the Covid-pandemic-affected previous 12 months.
Prices surged by 5.5% in the 12 months to January, up from 5.4% in December, due to rising energy, fuel and food prices.
Inflation is now rising faster than wages and is expected to climb above 7% this year. Public sector workers face an average pay cut of about £1,750 once inflation is taken into account, the IFS said.
It added that Sunak would also have to decide whether to increase defence spending as calls grow for more cash for military hardware after Russia invaded Ukraine. The departmental budget has been slated to fall in coming years.
“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,” said IFS director Paul Johnson.