The chancellor’s Spring Statement, due on 23 March, was not supposed to be a major fiscal event. The IFS said today that the rapid rise in inflation and the onset the conflict in Ukraine could force the chancellor into producing more than just a new set economic and fiscal forecasts.
The new IFS analysis published before the statement reveals the serious economic problems associated with this shifting outlook. Inflation will cause household and public services to be squeezed, as well the economy to be rocked by increased uncertainty and the financial crisis caused by Ukraine.
Higher inflation will erase at least 25% of real terms increases in public service spending announced in October.
If the government were to reflect that in higher public sector pay awards, it would come at an additional cost of around £10 billion, or around £1,750 per worker.
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Or, equivalently, if the changing outlook for inflation were not reflected in pay awards, the average public sector worker would see their gross salary reduced by around £1,750 in real terms. This would be in addition to the real pay cuts that many public sector workers (including many teachers) have suffered over the past decade, which ranged between 5 and 10%.
In terms of household budgets, just to provide the degree of protection against higher prices he intended back in February, Sunak could need to find more than £12 billion on top of the £9 billion already committed.
According to the IFS, the chancellor must make at least three major calls. Either he must borrow or spend more money, or he will take a greater hit to household incomes than at any point since at least the financial crisis, and possibly even the 1970s.
- He will either have severe real pay cuts for teachers, nurses, and other workers in the public sector, on top to massive cuts over a decade ago, or he will have to spend less on other areas of public services or increase public borrowing.
- He will either have the option of leaving defense spending as the sole element of government spending declining over the next 3 years and falling more than intended, given current inflation, or he can borrow more money.
Paul Johnson, director of the IFS, said: “At the Spring Statement Rishi Sunak has to make a huge judgment call. Will he do more for households to protect them from the rising energy prices over the past 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. Although he was forced to take big state action in the pandemic, we will learn more about his response to the crisis.
“A top up to the budget for defence spending in the coming year – given rising energy costs and Russia’s invasion of Ukraine – seems inevitable. More broadly, the era where chancellors could use defence spending cuts to enable NHS spending to rise without an overall increase in the size of the state seems well and truly over.”
