Britain’s leading tax and spending experts have warned Chancellor John Healey that his upcoming 28 October budget faces the risk of becoming a “work of fiction” unless he creates a credible plan to address £35bn in spending pressures. With ongoing instability linked to the war in the Middle East impacting public finances, the Institute for Fiscal Studies (IFS) has urged the government to abandon the temptation to delay difficult decisions until next year’s spending review. The thinktank warned Healey that failure to address the issue at his 28 October budget risked leaving the impression that Labour was setting unrealistic spending plans, against a febrile backdrop in the bond market.
IFS director Helen Miller warned that simply pencilling in implicit cuts that the government has no intention of delivering undermines fiscal integrity. She noted that this approach echoes previous criticisms aimed at former Conservative chancellor Jeremy Hunt, who faced accusations of relying on unrealistic spending projections prior to the 2024 general election.
The thinktank published its influential “green budget” report to analyze the state of public finances ahead of the Chancellor’s speech to the Commons. While the surge in debt interest costs could increase borrowing by £10bn for 2029-30, the IFS estimates that higher inflation will boost tax revenue, potentially limiting the impact on the Chancellor’s fiscal headroom to roughly £4bn. However, the report cautions that focusing solely on this buffer ignores the broader inflation shock currently threatening government service delivery. Attention before the budget has largely focused on the hit to the chancellor’s headroom against Labour’s main fiscal rule to balance day-to-day public spending with revenues in 2029-30.
Higher inflation reduces the purchasing power of public departments, forcing a choice between accepting service degradation or increasing taxes and borrowing. The IFS projects that funding Healey’s commitment to reach 3% of GDP in defence spending by 2030, while simultaneously offsetting the inflation shock, will require £35bn in either tax increases or benefit cuts. Failing to address these requirements would necessitate allowing the quality or quantity of public services to decline.
Regarding market volatility, the Bank of England governor, Andrew Bailey, recently emphasized that fiscal policy must be viewed as credible by financial markets. While some government sources have pushed back on Bank commentary, Miller argued that the Treasury must avoid the assumption that everything can be deferred. “We would be better served by a chancellor who hopes for the best, but plans for the worst,” she added. The Times quoted a government source as saying: “Andrew Bailey needs to focus on doing his job.”, the following day.
Market analysts have noted that the conflict in the Middle East has triggered a sell-off in government debt, likely erasing a significant portion of the £24bn buffer identified by former chancellor Rachel Reeves in the spring statement. Some economists suggest this market shift could wipe out roughly half of that available headroom.
In response to these findings, a Treasury spokesperson stated that the Chancellor remains focused on priorities such as economic growth and supporting households, all within the framework of fiscal discipline. The spokesperson also confirmed that the Office for Budget Responsibility will release updated forecasts alongside the budget in October, and the government would not comment on speculation regarding those contents.
Ultimately, the IFS asserts that while Healey is not required to draft detailed plans for the entire spending review period now, he must at least define the broad spending envelopes he is prepared to maintain. Staying the course with inherited plans without adaptation, according to the report, effectively allows inflation to derail departmental goals and forces deeper cuts to public services.
