Stakes are high as Chancellor’s giveaway risks worsening inflation

Additional £21billion of spending will push budget deficit up to just short of £100billion this year

Rishi Sunak’s attempt to ease the cost-of-living crisis by puting money in people’s pockets risks further stoking inflation. “We need to be careful,” the Chancellor told the CBI’S annual business dinner last week, as he warned of the risks of large amounts of money inflating the economy.

“At a time of severe supply restrictions, an unconstrained fiscal stimulus does risk making the problem worse – by pushing up prices still further, embedding high inflation expectations and creating a vicious cycle of even higher interest rates and more pain for tens of millions of mortgage holders and small businesses.”

Those concerns have not stopped him from promising a further £21billion of spending, most of which will be funded by ramping up borrowing – adding to a budget deficit expected to come in just short of £100billion this financial year.

Economists expect the giveaway to take the edge off the cost-of-living crisis, albeit far less so for the middle class. Mr Sunak stressed it is targeted at “millions of the most vulnerable people in our society”.

While consumers being given more money to spend should help soften the blow to the economy, it simultaneously threatens to further stoke the very inflation the Chancellor is trying to dampen and force the Bank of England to raise interest rates faster.

Sky-high inflation will also feed into benefits and state pension payments next year, because they are increased by September’s inflation figure.

Mr Sunak confirmed that the triple lock will be in place, guaranteeing that pensions will go up by the highest of inflation, average wages or 2.5 per cent, the latter a safeguard from what feels like a bygone age designed to ensure that retired households received healthy rises in their incomes.

Analysts at the Resolution Foundation estimate that a 9.5 per cent rise in the welfare bill, based on the expected inflation rate in September, will add £15billion to the Chancellor’s outgoings next year – an increase nearly as large as today’s sizeable handout, also adding to the price pressures tearing through the economy.

Paul Dales at Capital Economics says the extra borrowing and spending “will add to the already extensive inflationary pressure”, adding that “there is still a pretty good chance of a recession” despite the extra help. Such is the scale of the rise in energy prices.

Kallum Pickering, economist at Berenberg Bank, called the Chancellor’s policy “misguided”, warning that he may not be able to stop dishing out cash to help with inflation, even though doing so pushes prices up further.

“Now that the Government has committed to keep energy costs affordable with direct fiscal support, it will be hard to reverse – especially if it stokes even higher inflation down the road,” he says.

If the Bank of England has to ramp up interest rates faster as a result, Pickering adds, it risks “triggering a recession”.

“Unemployment would be much worse for living standards than high energy prices, that is for sure,” he added.

Allan Monks at JP Morgan expects the Monetary Policy Committee (MPC) will have to further raise interest rates this year, taking the base rate from 1 per cent to 2 per cent by the end of this year and 2.75 per cent by August 2023.

Sandra Horsfield, of Investec, says the windfall tax was “by no means sufficient” to cover the £37 billion of spending Sunak has pledged to address Britain’s cost-of-living crisis.

“The rest would appear to come from higher borrowing and using some of the ‘war chest’ built up, partly from past borrowing having been successively revised down,” she says.

“Bringing the public finances into better shape has been de-prioritised in light of the size of the squeeze to household budgets.”

‘When it comes to taxes, it is worth remembering that if we act in haste we may well repent at leisure’

Yet with the added sting of yet another tax rise, it also risks inflicting pain on the economy.

Jagjit Chadha, director of the National Institute for Economic and Social Research, says: “We are once again being treated to the spectacle of politics getting in the way of good economics.

“When it comes to taxes, it is worth remembering that if we act in haste we may well repent at leisure.”

“Taxes can and should come later, support must come now.”

The Chancellor’s cost-of-living support package will offset less than a fifth of the price increases faced by middle-class families this year.

The £200 discount on household energy bills announced this autumn will become £400 and is now a grant not a loan.

Mr Sunak’s support risks falling short of protecting middle-class consumers who will not receive measures such as a £650 welfare payment for means-tested benefit households.

Middle-income families can expect their costs to rise by close to £4,000 this year, according to Telegraph analysis, and the Government’s contribution will amount to 14 per cent of that figure.