£22bn needed to tackle inflation and energy
The Chancellor will need to find an extra £22bn to spend to just keep public pay above inflation and to support households with the energy crisis
Research published by the Institute for Fiscal Studies (IFS) ahead of the Spring Budget due on 23 March, claims that Chancellor Rishi Sunak will have to make the decision to ‘significantly increase spending and public borrowing’ or ‘cut public spending even further’ and face the worst drop in living standards for nearly half a century.
The research shows that if UK public sector workers are to avoid a ‘painful pay squeeze to their finances in the year ahead’ he will have to find an extra £10bn to spend on the public sector if the change in inflation outlook was fully factored in.
This cost would be across the 5.7m workforce and equivalent to £1,750 per worker.
The IFS states that inflation, which is set to peak above 7% in April, according to the Office for Budget Responsibility (OBR) has risen enough to wipe out a quarter of the ‘real-term increases’ that were planned.
The ‘more realistic’ outcomes would be an increase of around 5% which would cost around £4bn for NHS workers and covers more than a quarter of the planned increase for the NHS budget next year, and for schools, it would cost £1.75bn and would take up almost half of the planned budget increase. However, this would ‘still be a real-terms pay cut’ for all those within these sectors.
The IFS highlights that the Chancellor could possibly impose ‘severe real pay cuts on teachers, nurses and other public sector workers’ which is on top of the cuts that have been made over the last decade.
The changes in the inflation outlook since October will add around £11bn to the debt interest bill in 2021−22, and ‘could easily add another £20bn or more next year’. The research highlights that any interest rate increases by the Bank of England (BoE) could push the bill by another £11bn based on recent market expectations.
The thinktank states that this will ‘eat away’ at the small headroom that the Chancellor has against his fiscal targets and could ‘limit any room available for pre-election tax cuts’.
In terms of household budgets, the IFS states that ‘just to provide the degree of protection against higher prices’ Sunak would need to find more than £12bn on top of the £9bn which had been put aside in February to support struggling households with spiralling energy costs.
In regard to the rising energy prices, the IFS state that the government’s intervention ‘would now offset only about one-fifth of the rise in household energy bills’.
Rising energy prices will also put Sunak under more pressure to find extra money for the Ministry of Defence, which spends more than £600m a year on energy and fuel, and was already facing one of the tightest spending settlements.
The Russian invasion of Ukraine has rocked global commodity markets, with efforts across the US, UK and EU to reduce or ban imports of crude oil and gas driving up prices for other resources.
Paul Johnson, director, IFS, said: ‘At 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 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.’