John Healey has been warned by Britain’s leading tax and spending experts that his budget risks being a “work of fiction” unless he sets out plans to cover £35bn in spending pressures.
As the war in the Middle East rattles the public finances, the Institute for Fiscal Studies (IFS) said the damage from higher inflation meant the chancellor would need to either top up funds for his current government spending plans or impose deep real-terms cuts by the end of the decade.
Against a febrile backdrop in the bond market, 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.
Helen Miller, the director of the IFS, said: “Simply pencilling in implicit cuts that he has no intention of delivering would make the budget a work of fiction.”
Her comment echoes a criticism levelled at Jeremy Hunt, the former Conservative chancellor, who before the 2024 general election was accused by the then head of the Office for Budget Responsibility of setting unrealistic spending plans.
Publishing its influential “green budget” report, which analyses the public finances before Healey’s speech to the Commons, it called on the chancellor to avoid announcing a “steady as she goes” budget that delayed decisions until next year’s spending review.
“If John Healey sets out spending envelopes for public services that he would not be willing to live within, his plan for meeting the fiscal rules will not be credible,” it said.
Last week, the governor of the Bank of England, Andrew Bailey, said fiscal policy “must be credible and be seen as such by financial markets”. The following day, the Times quoted a government source as saying: “Andrew Bailey needs to focus on doing his job.”
Miller said the Treasury adopting an assumption that “everything can be kicked forward” to next year’s spending review risked undermining the chancellor’s credibility.
“We would be better served by a chancellor who hopes for the best, but plans for the worst, rather than sets out plans that either say, ‘I hope it’ll be fine and some money will come in’, or ‘I’ll get a plan in a year’s time’.”
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.
With the war in the Middle East fuelling a dramatic sell-off in the market for government debt, higher borrowing costs are expected to erase a significant chunk of the £24bn buffer left by the former chancellor Rachel Reeves at the spring statement.
Leading economists have predicted the market moves since the start of the war in February could wipe out about half of the headroom, adding to nerves in the Treasury over the risk of a market backlash.
The IFS said that although the surge in debt interest costs could add £10bn to borrowing in 2029-30, the exchequer would benefit from higher inflation boosting tax revenue – meaning Healey could see headroom cut by only £4bn.
However, it warned against focusing on this buffer because the inflation shock rippling from the Middle East would also dramatically hit the government’s plan for funding public services.
Higher inflation squeezes public spending power, forcing the government to choose between accepting real-term cuts and finding efficiency savings or topping up departmental budgets either by raising taxes or allowing an increase in borrowing.
The IFS said a choice to leave spending totals unchanged at the budget would implicitly mean allowing the quality or quantity of public services to fall. However, it said compensating for the inflation shock, and funding Healey’s pledge to raise defence spending to 3% of GDP by 2030, would require tax rises or benefit cuts of about £35bn.
“Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments’ spending plans off course,” Miller said.
“It would be a choice to tolerate chunky cuts to the quantity or quality of some public services – cuts that would be larger if defence spending was increased within existing totals.”
She said Healey would not need to make detailed plans for the next spending review period at the budget but merely set out overall spending envelopes that he would be prepared to live within.
A spokesperson for the Treasury said: “The chancellor is fully focused on his priorities to boost business, help with the cost of living and support people in every postcode, underpinned by fiscal discipline and a commitment to meet the fiscal rules with a buffer against uncertainty.
“The Office for Budget Responsibility will publish its updated forecast alongside the budget in October and we will not comment on rumour, speculation or proposals about its contents ahead of then.”
