Is the government in denial about the looming economic crisis?

Credit: PA

The priority for the UK and other rich democracies is to protect the people of Ukraine from the depredations of Putin's forces.

A close second should be protecting the poorest people in our countries and vital public services from the cancerous impact of soaring inflation, made much worse by the West's economic warfare against Putin's Russia.

The most basic costs of living are soaring. And that means a devastating recession that has already begun for all those but the richest. This blow to living standards will be the worst in living memory, more pernicious than the impact of either the banking crisis or Covid.

Talking to ministers and MPs, it is clear to me that they as yet fail to appreciate the scale of the economic shock that is upon us.

And ahead of the Chancellor's spring statement in a fortnight - his annual economic health check - there will inevitably be significant tension between Rishi Sunak and the prime minister about how much to spend to protect living standards and the most important public services from the ravages of inflation.

This is a very different debate from the one about how much to spend to protect workers and the economy from the impact of Covid-19, because the virus was thought to be a temporary phenomenon, whereas the reconfiguration of the global economy forced by the invasion of Ukraine will be permanent.

The immediate challenge is that embargoes on Russian oil, gas, wheat, minerals, assorted commodities, and associated disruption to important transport routes, are massively pushing up the prices of the basics of life - which hit those on middle-to-low incomes hardest.

In the space of not much more than a year, inflation in the UK has risen from less than 1% to 5.5% and may nudge 10% in coming months.

As just one example, from last autumn to the coming autumn, typical costs for a UK family to light and heat their homes are set to rise around £1,800.

It's true that the Treasury has already committed more than £9 billion to easing the pain of the energy price rises. But that delivers subsidies of just £350 for most homes, less than a fifth of the increased costs.

But perhaps the biggest dilemma for the government will be how and whether to protect public services from inflation, or how to honour promises to tackle the NHS's record backlog, remediate damage to schooling from Covid, and increase defence spending.

The important point is that in the Treasury's spending review of just a few months ago, the new departmental budgets for the next three years were set in cash. When the Chancellor claimed to be increasing resources for public services in real terms, that claim was based on inflation forecasts that were far too low and are ancient history.

As just one simple example, the soaring price of fuel will add hundreds of millions of pounds per annum to the costs of the armed forces and Ministry of Defence.

But the biggest potential squeeze on funds available, for schools, hospitals and the army, will be the impact of inflation on its salaries and pension bill. In the simplest terms, every extra pound given to a nurse to protect his or her pay from the impact of cost-of-living rises is a pound not available to expedite a hip operation or a cancer scan.

So probably the biggest decision for the Chancellor and PM is whether to shelter the pay of nurses, doctors, teachers and other public sector workers from the pain of rising prices, whether to increase their pay in line with or above inflation, or whether to force a huge squeeze in living standards on them.

And if their pay is protected from inflation, that will mean - in the health service alone - that there will be billions of pounds less to spend on operations and diagnosis.

There is a related crisis of purpose for the Bank of England and other central banks, which were already set on a course to raise interest rates, to suppress rising inflation.

But much of the inflation cannot be stopped. And the increase in the cost of money will only make the living standards crisis worse for poor people, and will increase the government's interest bill, further depriving it of funds for public services.

As I say, it is not clear to me that the government has quite yet grasped the scale of the economic challenge that is upon it.

When it does, I doubt the Ukraine-generated unity we've seen within parliament, and within the ruling Tory Party, will withstand the pressure.

The raw politics of how much a Conservative government should be borrowing to help public services and poor people will be back with a vengeance.