British finance minister Rishi Sunak must decide this month whether to borrow heavily again or let public sector workers and households suffer a big income hit due to the recent surge in inflation, a think tank said on Thursday.

Covering the hit to public sector pay from the jump in inflation since Sunak announced his last budget plan in October would cost the public coffers around 10 billion pounds ($13.2 billion), the Institute for Fiscal Studies said.

A further 12 billion pounds would be needed to restore the level of support for households facing a jump in their domestic energy bills that Sunak announced in February, the IFS said.

Sunak is due to announce an update to his budget plans on March 23.

In October, he said he was aiming to cut public borrowing to 83 billion pounds in the financial year which starts in April, less than half of borrowing in 2021/22 as his huge spending response to the coronavirus pandemic fades.

The IFS said Sunak would also have to decide whether to leave defence as the only main element of government spending set to fall over the next three years amid calls for more military investment after Russia's invasion of Ukraine.

"A top-up to the budget for defence spending in the coming year – given rising energy costs and Russia's invasion of Ukraine – seems inevitable," said IFS director Paul Johnson. ($1 = 0.7583 pounds)

(Writing by William Schomberg; Editing by Hugh Lawson)