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David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.

In nine days’ time, Rishi Sunak will deliver his Spring Statement. It was clearly his intention that it would be a relatively low-key event. The Office for Budget Responsibility would update its forecasts and perhaps a few reviews would be announced, but there would be little by way of big announcements on tax or spending policy. Spending matters were dealt with last October in the Comprehensive Spending Review, and tax announcements belong in a Budget – with the next one due in the autumn.

The Treasury likes having just one big fiscal event a year. It allows enough time for policies to be properly considered and it reduces the scope for other parts of Government to lobby for voter-friendly policies that cause havoc for the public finances. Sunak, wary of his Downing Street neighbour who is susceptible to such temptations, is likely to take the view that limiting this tiresome process to once a year is highly desirable. For one thing, it extends the period of time before the Prime Minister learns to spot the various Treasury tricks used to frustrate any attempt by outsiders at interfering in Budget matters.

The Chancellor was already under pressure to make the Spring Statement more substantial because of the cost of living squeeze. He pre-empted this with an announcement on a Council Tax rebate and loans on energy costs, and dug in on the forthcoming increase in national insurance contributions. We were heading for a tough spring, but it looked as if he could hold the line. And then came Russia’s invasion of Ukraine.

There are certain items of additional immediate expenditure necessary in response to the invasion that should not cause the Treasury too much difficulty. Additional emergency defence expenditure, including arms to Ukraine and NATO allies in the region; humanitarian aid for Ukraine and Ukrainian refugees; targeted interventions to expand domestic energy sources. There is a case (about which I suspect the Treasury is sceptical over the practicalities) for a big push over the next few months in improving home insulation.

It would be understandable if the Treasury’s focus is currently on what we need to do now, and address the more strategic questions later when the position with Ukraine has become clearer. The answer to such questions will almost certainly result in higher defence expenditure in the medium term, which will leave the Treasury with the headache of funding it. Both the long-term spending and the funding can be resolved at a later date.

Where it gets really difficult for the Treasury is the cost of living crisis. Before determining his policy response, the Chancellor will need to determine to what extent the crisis is the consequence of short-term, exceptional factors, such as this war, or whether it reveals that the cost of living is permanently higher than previously thought. If it is largely the former, the case for borrowing to intervene is stronger; if it is principally the latter, the case for taking those higher costs on the chin (preferably whilst protecting the most vulnerable) is increased.

We know that Sunak is a fiscal conservative. He will not consider it morally acceptable to subsidise current living standards at the expense of future generations in normal times. This is an important caveat. After all, Sunak the fiscal conservative is also the Chancellor who broke peacetime borrowing records in his first year in office. Needs must in exceptional circumstances.

There is a respectable argument to say that much of the squeeze in living standards is the consequence of high energy prices that stem from the invasion of Ukraine and our response to it; that this is the cost of economic warfare in a struggle in which we must prevail; and that future generations should not object to paying off debts incurred to combat threats to our way of life. In other words, protecting living standards now is to some extent analogous with creating a war debt.

The analogy only goes so far. We accumulated a lot of debt in two world wars and future generations did not resent it, but we also spent a great deal on defence during the Cold War during a period of time when debt generally fell as a percentage of GDP. Are we in a conflict lasting, at most, a few years or is this the new normal which may last decades? If the former, we can take a hit to our borrowing, if the latter we need to worry more about fiscal sustainability.

The situation is also complicated by the fact that much of the squeeze pre-dates the Ukrainian war. Energy prices were already high; living standards already set to fall. We are poorer than we previously thought, and that is unlikely to be immediately reversed, even if the Putin regime falls tomorrow and the Ukrainian conflict is quickly resolved. This suggests that we cannot avoid at least some hit to living standards,

A reasonable response would be to be willing to borrow to soften – but not eliminate – the squeeze in living standards. Higher increases in Universal Credit, the State pension and public sector pay than previously planned, perhaps some tax cuts (as many Conservative MPs are demanding), maybe an expansion of the council tax rebate scheme. Even taking into account that tax receipts have been higher than the OBR predicted in October, measures which only go half way to avoid falling living standards will see a deterioration of the public finances.

The Treasury then has two further complications.

First, inflation. The intention may be just to protect standards of living but borrowing more will constitute a fiscal stimulus at a time inflation is approaching double figures. This could result in the Bank of England increasing interest rates faster than would otherwise have been the case, which will impose further pressures on many mortgage-holders.

Economists differ on how big an inflationary problem we have and how far interest rates will rise (a further increase by the Bank of England is widely expected this week). Clearly, prices are rising quickly but higher commodity prices also take money out of the economy and suppress demand elsewhere. The risk is that we see stagnation – inflation and a stagnating economy as we saw after the oil shock of 1973.

The second problem is that temporary fiscal measures to address temporary cost of living pressures will have to be reversed when circumstances change. The experience of reversing the temporary UC uplift was a politically difficult one and, I suspect, has driven the Treasury to the bespoke council tax rebate scheme, which will be easier to drop in future. This might be good politics, but ends up with more complexity in our tax and benefit system.

All of this makes next week’s Spring Statement much more difficult than previously assumed. The briefing from the Treasury is that it is going to be policy-light, but I am sceptical. Domestic politics for the next few months will likely be dominated by the squeeze on living standards and inaction in the face of this will be unsustainable and politically perilous for the Chancellor.

Finding a response, however, that satisfies the public and Conservative MPs but does not further weaken the long-term outlook for inflation or the public finances may be Rishi Sunak’s greatest test yet. March 23 will be a big political moment after all.