Sunak could delay the pain for households but he can’t take it away

It’s hard to believe that Rishi Sunak has been chancellor for only two years. In that time, he has only presented three budgets; but it feels like a lot more. Through the first wave of coronavirus he seemed to return to the dispatch box virtually every other week to announce yet more tens of billions of pounds of spending to support the economy.

Even ignoring Covid, his budgets have been big ones. His spending review drew a pretty decisive line under austerity. He’s announced bigger permanent tax increases in his two years in office than Gordon Brown managed in ten.

Sunak had been hoping for a quieter time. He made clear in October that he was not intending to do more than present the most recent set of economic and public finance forecasts in the upcoming spring statement, due a week on Wednesday. In the event he has already popped up in February to offer a pretty stonking £9 billion package to offset the effects of higher energy costs on household budgets. And a lot more has happened since.

It seems unlikely he’ll do nothing additional next week in the face of the current crisis. He has some big decisions to make.

He had little choice over his response to Covid. Spending the odd couple of hundred billion was pretty much unavoidable. If you’re going to shut the economy down in response to a pandemic, you have to support jobs and businesses.

This time around he does have choices. There is nothing inevitable about a chancellor deciding to cough up more money to support either households or public services in the face of a big spike in inflation. And even if he does, there is no chance he will protect either of them in full. How far he does go will tell us a lot more about his economic philosophy than we learnt through Covid.

The first thing he’ll need to decide is whether to come back with a bigger package to support household incomes. With energy prices perhaps reaching levels double even what was expected in February, and inflation heading north of 8 per cent, the case for more support is strong.

Even after his February package, a combination of wages rising less quickly than prices, and big tax rises due next month, will see people on average sorts of earnings — about £30,000 a year — being a good £800 worse off next year than this. Higher earners will lose more in absolute terms.

The poorest, those who are reliant on means tested benefits, are also set to be worse off as their benefits rise by just 3.1 per cent in April. That’s not the government being deliberately mean, it’s just that they always rise in line with inflation as it was back in September — fine in normal years, not so much when the inflation rate is roaring ahead as it is now.

The case for supporting those on benefits seems unanswerable. They are suffering from a quirk in a system designed for times of lower and more stable inflation. Instead of focusing his February package on them, though, Sunak went for broad based, flat rate, support with all households getting a £200, repayable, rebate on their energy bill and four in five households in England getting a £150 council tax rebate.

Will he go further now that energy bills are expected to rise even further? He’ll be torn. If anything, it looks like energy prices won’t just be higher, they’ll be higher for longer. Compensating people for a temporary increase in costs is much easier than compensating for a permanent increase. And I don’t think Sunak believes that we should all be protected for ever from higher prices.

One thing he will for sure understand is that we are as a country just going to be poorer than we expected. He can’t protect us all from that for ever.

He has another choice to make too. He set out his plans for spending on public services in October when he had no inkling that inflation was going to get anywhere near so high. What looked like relatively large spending increases no longer look so generous. Higher inflation will eat in to the real value of the extra spending. He will be able to buy less than he intended.

The public sector spends at least £3 billion a year on energy and fuel. That bill will balloon, meaning less money for everything else.

Much more tellingly we spend a cool £240 billion employing public sector workers — nurses, teachers, soldiers and the like. Spending totals were set in the expectation of inflation being about 4 percentage points lower than it will actually be. Will public sector workers be compensated for the higher inflation, taking another £10 billion from money available for other things, or will they be subjected to more big real pay cuts? Or will the chancellor be tempted to borrow more to avoid difficult choices?

One indication is that last week the government’s evidence to the School Teachers Pay Review Body proposed a pay rise of just 3 per cent this year for experienced teachers. That would imply a 5 per cent real cut. It would come on top of 8 per cent real cuts since 2010. If that’s the way we are headed then many public sector workers are going to suffer another severe dent in living standards. And don’t forget they have spent the past decade doing even worse than their peers in the private sector. One wouldn’t want to bet against industrial strife.

We haven’t lived through a period like this perhaps since the oil crisis of 1973. That made us poorer. This crisis will also make us poorer. Sunak can smooth, delay and ameliorate the pain. But he can’t make it go away.

This article was first published in The Times and is reproduced here with kind permission.