With the conflict in Ukraine intensifying already eye-watering cost of living rises, Rishi Sunak is under pressure to produce more than a new set of economic and fiscal forecasts.
As the price of oil spiked this week following news the West is to ban Russian oil, UK families are facing the biggest real terms fall in income since the mid-1970s.
Ahead of the Spring Statement on March 23, Rishi Sunak is being urged to make a “huge judgement call” as energy prices soar and many workers are in-line for real term pay cuts.
The Institute for Fiscal Studies (IFS), which aims to promote effective economic and social policies, has warned Sunak must choose to either borrow billions more or allow families to suffer under a worsening cost of living outlook.
New IFS analysis, published ahead of the Spring Statement, lays bare the extent of the economic challenges facing Britain. The think tank warns that without more spending, energy bill payers will be hundreds of pounds worse off and public sector workers will face steep real term pay cuts.
Inflation already at a three-decade high
Prior to Russia’s invasion of Ukraine, Britain was on course for an inflation squeeze forecast by the Bank of England to top 7%, putting the rate of price increases at a three-decade high.
In the wake of the conflict in Ukraine, everything from energy, fuel and food, is set to rise even further. Gas prices have already risen in response to the war in Ukraine and are currently 20 times higher than they were two years ago.
Being the world’s second biggest producer and largest exporter of natural gas, energy sanctions on Russia from the West is likely to push energy prices up for UK households. Warnings have been made that this could happen despite the UK not relying heavily on Russian gas, as it would have an impact on global energy markets.
Public sector workers face a huge real term pay reduction
The IFS has calculated that higher inflation will demand at least a quarter of the real terms pay increases to public services. The think tank’s report contends that public sector workers will face an average real-terms reduction in salary of £1,750.
Paul Johnson, IFS director, said: “At the Spring Statement Rishi Sunak has to make a huge judgement call. Will he do more to protect households from the effects of energy prices which have risen even further in the last two weeks? If he doesn’t then many on moderate incomes will face the biggest hit to their living standards since at least the financial crisis. If he does, then there will be another big hit to the public finances.
“While he had little choice over big state action through the pandemic, his response to this crisis will tell us more about how he sees the limits of government in protecting citizens from buffeting by external forces.”
The think-tank estimates that if the chancellor wants to achieve the same level of protection for household budgets as he announced earlier this year, he will need to find an additional £12bn.
A spokesperson for the Treasury said the government was already providing over £20bn to help people with the cost of living.
“Russia’s devastating invasion of Ukraine will have a huge impact on lives and livelihoods around the world and the effects will be felt across this country.
“It is right that we do all we can to show solidarity with the people of Ukraine and work with our allies and partners to impose the most punishing sanctions to inflict maximum and lasting pain on Russia,” the spokesperson said.
Chancellor under pressure to scrap the NI levy
Rachel Reeves, the shadow chancellor, has accused the government of allowing the “cost of living crisis to spiral out of control since September.” The Labour MP is calling on Sunak to reconsider “unfair” National Insurance contributions, which are due to increase in April to help fund NHS recovery after the pandemic and social care in England.
With the Spring 2022 forecast statement just two weeks away, the chancellor is under pressure to scrap the National Insurance levy, as the cost-of-living soars to terrifying highs.
Gabrielle Pickard-Whitehead is a contributing editor to Left Foot Forward