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

Chancellor John Healey must find approximately £35 billion to simultaneously raise defense spending to 3% of national income by 2030, lift health spending, and avoid cuts to other government departments, the Institute for Fiscal Studies warned this week.

The think tank said higher inflation driven by conflict in the Middle East and Europe has tightened the fiscal math considerably. If Healey pursues all three goals within inherited spending plans, he faces either significant cuts to other services, tax increases, or a combination of both.

"A 'steady-as-she-goes' Budget is not an option available to the chancellor," IFS director Helen Miller said. "Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction."

The Budget is scheduled for October 28. Miller told the BBC that Healey inherited spending plans where departmental growth would slow over coming years, making cuts likely even before new pressures emerged. The Iran conflict and Ukraine war have pushed energy prices higher globally, boosting inflation and raising UK government debt interest payments.

The IFS estimates recent financial turbulence and inflation will add around £10 billion to borrowing cost forecasts for 2029-30. Although higher inflation boosts tax revenues, it erodes the cash value of departmental budgets, compounding the challenge.

The government has constrained its own options. Labour's manifesto pledged not to raise National Insurance, income tax, or VAT. Former Chancellor Rachel Reeves announced billions in tax rises, but Prime Minister Keir Starmer committed to honoring the manifesto pledge. Miller said meeting fiscal targets through tax increases would require "lots of small things to get up to big sums."

The IFS expects the government to meet its fiscal rules, which require borrowing only for investment by 2029-30 and debt reduction as a percentage of GDP. However, the buffer of "headroom" for unexpected costs will narrow to roughly £20 billion, down from £24 billion predicted in the Spring Statement. The official Office for Budget Responsibility forecast may differ substantially.

Healey stated his Budget "will build on this approach with fiscal discipline helping to deliver economic resilience" and give people "breathing space." The IFS expects any household support to be temporary and limited in scale.

The think tank noted its forecasts carry exceptional uncertainty given current volatility. Healey does not have to address total spending levels in this Budget and may defer such decisions to a future Spring Statement or Spending Review when economic conditions may be clearer.