Inflation is just one of the problems coming to haunt Rishi Sunak

But before our Rishi can move next door, he has to present a Budget on March 23. And he may find that his luck is running out. Or at least that he now faces a mass of economic problems that are difficult to reconcile: tacking inflation, funding an increased military budget, ameliorating the impact of rising energy prices on living standards and adhering to the Tory mantra that the state has to shrink.

Begin with inflation, the spectre at the Budget feast. The millennial generation has not experienced real inflation. Folk of my era lived with prices rises of 25% a year back in the 1970s. But there were strong trades unions in those days which were in a position to force protective wage rises. That is not the case today.

The latest forecasts suggest inflation is going to hit 8%. Given this ignores variables such as housing costs, the true figure is nearer 10%. A couple of years of that kind of price rise will erode living standards dramatically. Sunak will be under tremendous pressure to raise social benefits, pensions and Universal Credit to compensate. But where will the cash come from?

He could up taxes, but he is already doing that. National Insurance is already scheduled to go up in April. He might fiddle with income tax bands, but he is already doing that to some extent. He might raise business taxes… but he is already doing that. And don’t forget that VAT goes back to 20% next month – ouch! The Chancellor is in a real bind. So far, Sunak has rejected a windfall tax on surging energy profits. He may well come under pressure to reverse that decision.

All of which suggests his emphasis is going to be on spending cuts – or at least freezes in public sector wages and benefits. The independent Institute for Fiscal Studies (IFS) reckons that if the Chancellor does nothing, public sector wages will fall by an average of £1750 per worker in real terms. A couple or three years of frozen public sector wages will have a devastating impact on incomes. That will spread to Scotland because of Barnett consequentials.

Sunak’s next problem is war in Ukraine. He cannot avoid raising defence spending over the next five years. Currently the UK spends around 2.3% of GDP on defence. Already there have been calls to double that. My guess is that the Chancellor will make some moves to give the Ministry of Defence more cash but the real shift in military spending will come over the next few years.

In fact, the whole shape of public spending is about to be recast by military needs. To accommodate this, we can expect a squeeze on health funding. As the world defaults towards a new militarism, I doubt if ordinary voters have understood the logical impact on real NHS spending. Effectively, since the end of the original Cold War, the resources going towards health have been funded by the decline in military budgets. In retrospect, it would have made better sense to enshrine an architecture for global peace rather than expand Nato activities into Afghanistan, Libya and Eastern Europe. The NHS will now suffer the consequences.

Of course, greater military spending has an economic impact. It will boost the activities of defence contractors and shift manpower into military occupations. That, in turn, will add to GDP but not in any real productive sense. The civilian economy will be squeezed by the shift of resources to arms manufacturing and extra troops. The global shortage of microchips will just get worse as the military increases its demand for high-tech. All of this will have an impact on real standards of living.

READ MORE: UK Government 'may use Ukraine as cynical cover for cost-of-living failures'

Sunak's next problem is that the remorseless rise in inflation has wrecked his carefully laid plans to mitigate the spike in home energy costs. In February, he put in place a rather complicated scheme to subsidise households against the rise in gas prices. This was worth circa £9 billion from the public purse. In some ways, this scheme was cosmetic, but it gave the impression the Tory government was doing something. However, the Ukraine war has added to energy price inflation. This means Sunak needs to find another £12bn in subsidies, just to remain in the same place. Don’t count on that.

The Government may just tough it out, counting on pro-war and anti-Putin sentiment in the UK to make voters willing to accept the decline in living standards. But such a political mood is unlikely to last indefinitely even if it finds allies in unexpected places. The belligerent attitude of the SNP, including support for a Nato policed no-fly zone in Ukraine, has given the Tories a lot of short-term political cover. The SNP can hardly call for butter and guns, and still hope to retain credibility.

The problem lies with our old friend the Bank of England. The Bank seems intent on responding to the return of inflation by raising interest rates. If inflation is caused by excess demand, fair enough. Higher interest rates stymie consumer spending and reduce excess spending. But today’s inflation is the result of energy and supply shortages at source. Bumping up interest rates is an insane response. It will only reduce supply by making it more costly, making the problem worse.

Rising interest rates will put up mortgage costs and actually increase the government’s own bill for borrowing. As a result, Sunak will have to move cash from public services to repaying the banks. One obvious solution is a windfall tax on the City of London. But don’t expect that from a Chancellor who is himself a former banker and hedge fund manager.

I’m tempted to say all this leads to the conclusion we need independence as soon as possible in Scotland. Except that the current SNP leadership is likely to be even more committed to increasing defence spending and proving its financial credentials by bumping up interest rates. The reality is that we need to use independence to chart a different economic course from Chancellor Sunak.

This would include reducing interest rates rather than raising them, which will boost growth (by making investment cheaper) and raise tax income to the Scottish Treasury. Next, we could use public control of Scotland’s energy resources to mitigate the cost of prices rises for the most vulnerable. Windfall profits will automatically accrue to the state to fund investment in cheap renewables. That in turn could fund a state sovereign wealth fund on the lines of Norway’s, to support welfare spending and pensions.

Anyone for an independence referendum this year?