Chancellor John Healey faces mounting pressure to address a shortfall in departmental spending plans as geopolitical conflict drives up inflation, the Institute for Fiscal Studies has warned ahead of his first Budget on 28 October.
The US-Israel war in Iran and Russia's invasion of Ukraine have pushed energy prices higher globally, lifting inflation and increasing the cost of UK government debt servicing. Healey acknowledged this threat in remarks before the International Monetary Fund meeting, stating: "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."
The IFS said higher-than-expected inflation will squeeze departmental budgets unless the government acts. It estimates the Treasury may need to find an extra £25bn in 2029-30 simply to maintain current spending levels in real terms, before accounting for planned defence spending increases. This creates a binary choice: the government must either cut programmes, raise taxes, or do both.
IFS director Helen Miller warned against disguising the scale of the problem. "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," she said.
The think tank expects the government will still meet its self-imposed fiscal rules. Those require the government to borrow only for investment by 2029-30 and reduce debt as a percentage of GDP. However, the expected "headroom" buffer has shrunk from £24bn (forecast by the Office for Budget Responsibility at the Spring Statement) to around £20bn, leaving less room for error in a volatile environment.
The Treasury declined to comment on what it called "rumour and speculation". Healey has promised his Budget will deliver "fiscal discipline" and "breathing space" for households, though the IFS expects any household support to be temporary and limited in scale.
The IFS cautioned that forecasts remain exceptionally uncertain and the official OBR forecast, upon which Healey will base his plans, could diverge significantly. Healey is not required to set out full spending totals in this Budget and may defer decisions to the Spring Statement or future Spending Review.