Healey faces £35bn Budget challenge to meet spending pledges, says think tank

Chancellor John Healey must find £35bn to simultaneously raise defence spending to 3% of national income by 2030, increase health spending and avoid cuts to other public services, according to the Institute for Fiscal Studies.

The IFS, an influential independent think tank, said the government faces a narrow set of options: spending cuts, tax rises or a combination of both. Higher inflation driven by conflict in the Middle East and Ukraine has increased borrowing costs and reduced the real value of department budgets, tightening the constraint.

Healey inherited spending plans where department budgets were already projected to grow slowly. Adding the defence commitment on top of those inherited plans creates a £35bn gap if no other services face cuts, IFS director Helen Miller said. "A 'steady-as-she-goes' Budget is not an option available to the chancellor," Miller stated.

The chancellor has pledged "fiscal discipline" and told the IMF this week that his Budget "will build on this approach with fiscal discipline helping to deliver economic resilience." But Miller warned the BBC that simply pencilling in spending cuts the government does not intend to deliver "would make the Budget a work of fiction."

Labour's election manifesto rules out raising National Insurance, income tax or VAT on working people. Miller said finding large sums through tax rises while respecting that constraint would require "lots of small things." Former chancellor Rachel Reeves announced billions in tax rises earlier this year.

The IFS expects the government to meet its fiscal rules, which require that it only borrow for investment by 2029-30 and reduce debt as a percentage of GDP. However, the "headroom" buffer between the government's plans and those rules will narrow to around £20bn from the £24bn forecast in the spring, the IFS said. That reduction reflects £10bn in additional borrowing costs driven by higher inflation and bond market turbulence.

The Budget takes place on 28 October. Healey does not have to address long-term spending totals in this Budget and could defer decisions to a spring statement or spending review next year. But the IFS warns that avoiding the issue would damage credibility with financial markets. The government faces growing pressure to demonstrate tight fiscal control as borrowing costs rise.

The IFS cautioned that its forecasts remain "exceptionally uncertain" in the volatile environment, and the official Office for Budget Responsibility forecast could differ materially.