Chancellor must choose between borrowing or hitting households hard, experts say
The Chancellor faces a ‘huge judgment’ over whether to borrow billions more or allow households to deal with what could be the biggest hit since the 1970s, experts have said.
The cost of living is expected to skyrocket this year, particularly due to rising energy prices, which have been pushed up by Russia’s invasion of Ukraine.
Without intervention, public sector workers face an average pay cut in real terms of around £1,750 due to inflation, while many households will struggle to keep up with bills.
There are three massive choices the chancellor faces on what was originally expected to be a fairly quiet spring statement this month, the Institute for Fiscal Studies (IFS) has said.
Either it will have to borrow billions or it will risk being the hardest hit by households for decades.
It will also have to impose severe real pay cuts on teachers, nurses and others in the public sector, borrow even more to pay them better, or cut spending on other public services.
As war rages in Eastern Europe, the Chancellor will also have to decide whether to let defense spending fall over the next three years, or borrow to increase it.
“When reporting the spring, Rishi Sunak has to make a huge judgment call,” said IFS director Paul Johnson.
“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 face the biggest hit to their standard of living since at least the financial crisis.
“If he does, then there will be another blow to public finances.
“While he has had little choice over the action of major states 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 from external forces.
Soaring energy prices since Russia launched a full-scale invasion of Ukraine are likely to add to already high household energy bills.
In total, energy prices are expected to add around £43billion to household costs, meaning the Chancellor’s £9billion package will only offset around a fifth of the rise.
If Mr Sunak is to achieve the same level of protection he announced earlier this year, the price spike will require around £12.5billion on top of the £9billion already committed, the IFS said. .
According to the predictions, someone with a median salary of £27,500 is likely to be around £800 worse off, or £300 more than previously predicted.