Healey faces £35bn Budget challenge to meet spending pledges, says think tank

Key points

• The IFS says Healey needs about £35bn in cuts or tax rises to meet spending pledges.
• Higher inflation from the Iran war is squeezing departmental budgets.
• Healey must present credible spending plans in the Budget on 28 October.

The Institute for Fiscal Studies (IFS) has said Chancellor Healey faces a Budget challenge of around £35bn if he wants to raise defence spending to 3% of national income by 2030 and increase health spending without cutting other departments. The think tank said higher inflation, caused by the Iran war, could reduce what the government hoped to spend on public services, forcing Healey to choose between spending cuts, tax rises, or a mixture of both.

The government is under growing pressure to show financial markets it has a tight grip on finances as the cost of borrowing rises. The IFS said Healey must set out credible spending plans in the Budget on 28 October.

What the IFS said

IFS director Helen Miller said a steady-as-she-goes Budget is not an option for the chancellor. She said staying with inherited tax and spending plans would let inflation blow departments' spending plans off course, and that pencilling in implicit cuts he has no intention of delivering would make the Budget a work of fiction.

Miller told the BBC's Today programme that Healey inherited spending plans where growth would slow in coming years. She said it already looked likely he would have to make cuts just to live within those, and now the Middle East war has pushed inflation up, making those plans very tight. She said if he wanted to do all of that within current spending plans, he would have to cut other services by something like £35bn.

A 'steady-as-she-goes' Budget is not an option available to the chancellor

— IFS director Helen Miller

Healey's response and outlook

Speaking ahead of the annual International Monetary Fund meeting this week, Healey said the consequences of conflict in the Middle East and Europe are hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home. He said Britain and its allies can face these challenges together, and his Budget will build on this approach with fiscal discipline helping to deliver economic resilience and give people breathing space.

The IFS expects the government to meet its fiscal rules, but with a smaller buffer of around £20bn, less than the £24bn predicted by the Office for Budget Responsibility in the Spring Statement. The IFS also expects any breathing space help for households to be temporary and limited in scale. It warned that its forecasts are exceptionally uncertain and the OBR's official forecast may differ.