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

Chancellor John Healey needs to find £35bn to avoid spending cuts while keeping defence promises, the Institute for Fiscal Studies warned ahead of the 28 October Budget.

The think tank said that if the government raises defence spending to 3% of national income by 2030 and protects health spending, other departments will face cuts of roughly £35bn unless taxes rise or borrowing increases. IFS director Helen Miller told the BBC that Healey inherited spending plans that already looked tight. Higher inflation caused by conflict in the Middle East and Ukraine has made the position worse by eating into what departments can buy with their cash budgets.

Healey said his Budget will combine fiscal discipline with help for households facing higher energy prices and mortgage costs. But Miller argued that "a 'steady-as-she-goes' Budget is not an option available to the chancellor." Staying with inherited plans while inflation rises would force cuts Healey does not intend to deliver, she said.

The government faces pressure from financial markets to show it controls public finances as borrowing costs rise. Labour's manifesto rules out raising National Insurance, income tax or VAT, constraining the tax options available. Miller said finding large sums through tax rises would require "lots of small things."

The IFS expects the government to meet its fiscal rules, which require it to borrow only for investment by 2029-30 and reduce debt as a percentage of GDP. However, the think tank predicts a smaller safety margin of around £20bn headroom, down from £24bn forecast by the Office for Budget Responsibility at the Spring Statement. Turbulence on bond markets and higher inflation are forecast to add about £10bn to government borrowing costs in 2029-30.

Healey does not have to detail spending totals in this Budget and may defer such decisions to a Spring Statement or Spending Review next year, when economic forecasts may shift. But the IFS warned that avoiding the issue would undermine confidence in the government's plans. The IFS also noted that its forecasts are unusually uncertain given current volatility, and the official OBR forecast could differ significantly.