IFS warns UK budget is fiction without a plan for £35bn gap

Britain’s leading tax and spending experts have told John Healey that his budget will amount to a “work of fiction” unless he sets out a clear plan to cover £35bn in spending pressures, striking at the heart of whether the government’s public service plans can actually be delivered.

The Institute for Fiscal Studies (IFS), publishing its influential “green budget” report ahead of the chancellor’s 28 October statement to the Commons, said higher inflation, driven by the war in the Middle East, had blown a hole in the funding assumptions behind current spending plans. By the end of the decade, Healey must either top up departmental budgets or accept deep real-terms cuts, the thinktank said.

Helen Miller, the IFS director, framed the risk in blunt terms of delivery rather than presentation. “Simply pencilling in implicit cuts that he has no intention of delivering would make the budget a work of fiction,” she said. Her comment echoes a criticism previously 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.

The core operational problem, as the IFS lays it out, is that inflation erodes what departments can actually buy. Higher prices squeeze public spending power, forcing a choice between accepting real-term cuts, finding efficiency savings, or topping up budgets through tax rises or additional borrowing. Leaving spending totals unchanged at the budget would implicitly mean allowing the quality or quantity of public services to fall, the thinktank said. Compensating for the inflation shock while also 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.”

The IFS urged the chancellor to avoid a “steady as she goes” budget that postponed decisions until next year’s spending review. It cautioned that if he sets out spending envelopes for public services he would not be willing to live within, his plan for meeting the fiscal rules would not be credible. Miller added that adopting an assumption that “everything can be kicked forward” to the 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’,” she said. She noted that Healey would not need detailed plans for the next spending review period at the budget, only overall spending envelopes he was prepared to live within.

Much of the attention before the budget has centred on the chancellor’s headroom against Labour’s main fiscal rule, which requires day-to-day public spending to be balanced with revenues in 2029-30. The war in the Middle East has fuelled a dramatic sell-off in the market for government debt, and 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 that market moves since the war began in February could wipe out about half of that headroom, adding to nerves in the Treasury over the risk of a market backlash.

The IFS offered a partial offset on that measure. The surge in debt interest costs could add £10bn to borrowing in 2029-30, but higher inflation also boosts tax revenue, meaning Healey’s headroom could be cut by only £4bn. The thinktank warned against focusing on this buffer, however, because the inflation shock rippling from the Middle East would also dramatically hit the government’s plan for funding public services.

The warning landed against a febrile backdrop in the bond market. 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.”

A Treasury spokesperson 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.”

Whether Healey uses the 28 October statement to set out envelopes he can live within, or defers the hard choices to the spending review, will determine whether the £35bn gap gets a plan or stays a promise.