UK Chancellor John Healey faces tough choices over taxation, public spending and government borrowing as rising energy prices linked to the US-Israel war against Iran threaten to undermine the financial assumptions underpinning his first Budget, the Institute for Fiscal Studies (IFS) has warned.
The influential think tank cautioned that higher-than-expected inflation could erode the purchasing power of departmental budgets, leaving the government with less room to finance public services than originally anticipated.
The IFS has urged Healey to ensure the spending plans in his Budget are credible, warning against relying on future cuts that Ministers have little intention of implementing.
Speaking ahead of the International Monetary Fund’s annual meeting, Healey acknowledged the international pressures affecting UK economy and stated that the government would seek to protect households while maintaining fiscal discipline.
“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. But Britain and our allies can face up to these challenges together.”
John Healey
John Healey added that his Budget “will build on this approach with fiscal discipline helping to deliver economic resilience” and give people “breathing space.”
However, the government is under growing pressure to demonstrate to financial markets that it has a credible grip on public finances, particularly as borrowing costs rise and inflation complicates decisions over future spending.
IFS Warns Against Unfunded Promises and Unrealistic Cuts
Also, the IFS has cautioned Healey against using his 28 October Budget to announce spending commitments that the government cannot realistically honour, arguing that a continuation of existing plans may no longer be sufficient to protect public services from the effects of higher inflation.
According to IFS Director Helen Miller, “a ‘steady-as-she-goes’ Budget is not an option available to the Chancellor.”
“Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments’ spending plans off course. Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction.”
Helen Miller
The IFS estimates that maintaining departmental budgets in real terms could require the government to find an additional £25 billion in the 2029-30 financial year. That estimate comes before accounting for the government’s ambition to increase defence spending, which could add further demands to an already constrained fiscal position.
Meeting such a funding requirement could point towards substantial tax increases unless ministers identify savings elsewhere or revise their spending commitments.
The Chancellor does not necessarily have to settle every departmental spending question in the October Budget. He could defer some decisions until next year’s Spring Statement or a subsequent Spending Review, when the economic outlook may be clearer.
However, the IFS argues that postponing decisions does not remove the underlying problem. The spending plans inherited from former Chancellor Rachel Reeves could leave some departments unable to keep pace with inflation in the coming years.
If the government leaves those assumptions unchanged without explaining how the resulting shortfalls will be addressed, the think tank warns, doubts could grow over whether its fiscal framework is realistic.
Higher Borrowing Costs Narrow Healey’s Fiscal Headroom
The IFS expects recent turbulence in bond markets and higher inflation to add around £10 billion to forecasts for government borrowing costs in 2029-30, further narrowing the chancellor’s room for manoeuvre.
Despite that increase, the think tank still expects the government to meet its self-imposed fiscal rules by the end of the decade. Those rules require the government to borrow for investment rather than day-to-day spending and to reduce public debt as a share of gross domestic product.
Higher inflation could also increase tax receipts, partly offsetting the additional pressure from borrowing costs. However, stronger nominal tax revenues do not automatically translate into greater spending capacity, particularly when inflation simultaneously increases the cost of delivering public services.
The IFS estimates that Healey’s remaining fiscal headroom could fall to around £20 billion. That would be lower than the £24 billion buffer forecast by the Office for Budget Responsibility (OBR) at the time of the Spring Statement.
Headroom represents the margin by which the government expects to meet its fiscal rules under the official forecasts. A smaller buffer leaves less protection against unexpected economic developments that could weaken revenues or increase expenditure.
The IFS has stressed that the current outlook is exceptionally uncertain, given the volatility of energy prices, international conflicts, and financial markets.
READ ALSO: University of Ghana Postpones 2026/2027 Academic Year Reopening
