Chancellor Rishi Sunak must make a huge judgement call on government spending and borrowing at this month's Spring Statement, the Institute for Fiscal Studies (IFS) said.
The Chancellor's Spring Statement, set to be delivered on 23 March, was not supposed to be a major fiscal event. However, the IFS says rapidly rising inflation and the onset of the conflict in Ukraine might force the Chancellor to produce more than just a new set of economic and fiscal forecasts.
Higher inflation will wipe out at least a quarter of the real terms increases to public service spending announced back in October, it added.
The IFS says that in terms of household budgets, just to provide the degree of protection against higher prices he intended back in February, Mr Sunak could need to find more than £12 billion on top of the £9 billion already committed.
Paul Johnson, Director of the 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.'