The Chancellor faces a stark choice between a sharp rise in spending or the worst drop in living standards in nearly half a century in her spring statement this month, the Institute for Fiscal Studies warned ( IFS), an economic think tank.
Rishi Sunak will have to decide whether to “spend and borrow billions more, or allow a greater impact on household incomes than at any time since at least the financial crisis and most likely since the 1970s”, said the IFS.
The Russian invasion of Ukraine has rocked global commodity markets, with efforts in the US, UK and EU to reduce or ban imports of crude oil and gas, pushing up prices. prices from other sources.
Energy prices, already high before the conflict broke out, could now hit households by £43billion, according to the IFS. This compares to a £9bn package of measures to alleviate energy bills, which was developed by the Treasury before the Russian invasion and subsequent sanctions.
Government intervention “would now only offset around a fifth of the rise in household energy bills”, the IFS said.
Before the Covid-19 pandemic and Brexit caused seismic shifts in government policy, the Treasury intended to have one tax event per year, with an autumn budget and a spring statement. However, that is now unlikely given the scale of the pressure on households, the IFS said.
IFS Director Paul Johnson said: “In the spring statement, Rishi Sunak has to make a huge judgment call. Will he do more to protect households from the effects of energy prices which have risen further? 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,” Mr Johnson added.
In an illustration of how the Russian invasion changed the scale of the blow to households, someone earning £27,500 a year would have been £500 worse off by 2023, before the attack on the Ukraine, according to forecasts from Citigroup, a bank and financial services company and shared by the IFS. This has now climbed to £800. Meanwhile, someone with almost £42,000 will be £1,300 worse off now, compared to an estimate of £900 before the Russian invasion.
The impact of higher interest rates aimed at slowing the pace of inflation, which is expected to reach 8% in April, according to a series of economists, will also hurt public finances, according to the IFS analysis. Rising inflation since October last year is expected to add around £11bn to the government’s debt interest bill in 2021-22.
Meanwhile, public sector workers were “very likely” to face a pay rise below inflation this year, the IFS said.
Retaining its place as NATO’s second largest military spender in real terms, after the United States, will also mean choosing between higher spending and borrowing or deep cuts to the budgets of other departments, the IFS said. To retain this place in the spending rankings would require a commitment of around 2.5% of UK GDP.
On Wednesday, Business Secretary Kwasi Kwarteng told MPs the British public was ready to bear the pain of rising energy costs.
Fellow Tory MP Desmond Swayne said the government should be ‘clear’ with the British people that they would have to make sacrifices while Ukrainians were making ‘much greater sacrifices’.
In response, Mr Kwarteng said “people understand” the situation.
The swap came after the government said it would phase out imports of Russian petroleum and petroleum products by the end of the year.
“People are ready to endure the hardships in solidarity with the heroic efforts the Ukrainian people are making,” the business secretary said. “People understand that in this country, because we are a generous and generous country.”
Shadow Chancellor Rachel Reeves said the government had let the cost of living crisis “spin out of control since September”, a problem that would be made worse by “unfair tax hikes”.
“The Tories are set to halt their National Insurance hike in April – and they must reconsider Labour’s proposal for a one-off windfall tax on oil and gas producers to cut household energy bills by up to 600 £,” she said.
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This notice was published: 2022-03-10 08:25:45