Chancellor faces tough calls over households’ income hit, says IFS

Chancellor Rishi Sunak faces a “big judgment call” over whether to borrow more or allow household budgets to be squeezed, new research suggests.

The Institute for Fiscal Studies (IFS) says the rising cost of living and the war in Ukraine pose new challenges ahead of the spring declaration.

Without additional protection, many households will struggle to keep up with the bills, they say.

The cost of living recently hit a 30-year high.

Prices rose 5.5% in the 12 months to January, up from 5.4% in December, on the back of rising energy, fuel and food prices.

Inflation, which measures how quickly the cost of living is increasing over time, is now rising faster than wages and is expected to rise over 7% this year.

As Vladimir Putin’s invasion of Ukraine further drives up the cost of energy, fuel and other raw materials, Chancellor Rishi Sunak faces three major decisions, according to the IFS.

The first is whether to borrow billions more or allow household incomes to take a bigger hit than at any time since the financial crisis. The government has already increased borrowing in recent years to fund Covid-related measures such as the furlough scheme.

Mr Sunak must also weigh whether to allow inflation to impose effective wage cuts on teachers, nurses and other public sector workers – or spend less than expected on other parts of the public service when borrowing is not an option.

Public sector workers face an average pay cut of around £1,750 when inflation is factored in, according to the IFS study.

And as the war in Ukraine rages on, the chancellor will have to decide whether to cut defense spending over the next three years or borrow to boost it.

“With the spring declaration, Rishi Sunak has a big judgment to make,” said IFS Director Paul Johnson.

“Will he do more to protect households from the impact of energy prices, which have continued to rise over the past two weeks?

“If he doesn’t, many on moderate incomes will face the biggest slump in their living standards since at least the financial crisis… If he does, then there will be another big slump in public finances.”

If Mr Sunak wants to achieve the same level of protection for household budgets as he announced earlier this year, he will need to raise an extra £12billion, the IFS suggests.

While the Chancellor may have had no choice but to spend billions to protect the economy in the extraordinary circumstances of the pandemic, Mr Johnson suggests the Chancellor’s response to the cost-of-living crisis will reveal more about how he is playing the government’s role in protecting it the consumer outside sees events.

Energy regulator Ofgem chief Jonathan Brearley, for example, said households are heading for an “almost inevitable” rise in energy bills in the autumn.

Spikes in wholesale gas prices, which had risen before Russia invaded Ukraine, would be passed on to consumers, he warned on Tuesday.

A Treasury spokesman said the government was already making available over £20billion to help people with the cost of living and would continue to monitor the economic impact of the conflict.

“Russia’s devastating invasion of Ukraine will have a huge impact on lives and livelihoods around the world, and the impact will be felt across the country,” the spokesman said.

“It is right that we are doing everything we can to show solidarity with the people of Ukraine and are working with our allies and partners to impose the toughest sanctions to inflict maximum and lasting pain on Russia.”

The shadow chancellor, Labor MP Rachel Reeves, has accused the government of “letting the cost of living crisis spiral out of control since September”.

She urged the Chancellor to reconsider “unfair” social security contributions, which are due to rise in April to fund welfare in England and help the NHS recover from the pandemic.

The Labor Party has proposed introducing a one-off “windfall” tax on oil and gas producers, which would then be used to lower energy bills for consumers.