Healey told he cannot risk a 'steady as she goes' Budget as IFS puts the gap at 36 billion pounds
The Institute for Fiscal Studies says the Chancellor will need 36 billion pounds of tax rises or welfare cuts in his 28 October Budget, and warns against simply pencilling in spending cuts he has no intention of delivering.
John Healey will need to find 36 billion pounds in tax rises or welfare cuts in his first Budget simply to offset the inflation hit to public services and meet a defence spending pledge, the Institute for Fiscal Studies has warned.
The think tank's pre-Budget Green Budget report says a 'steady-as-she-goes' Budget on 28 October is not an option, because the tax and spending plans inherited from Rachel Reeves have been overtaken by the inflation rise caused by the Iran war, and unchanged plans may not be seen as credible by investors.
"It would be a choice to tolerate chunky cuts to the quantity or quality of some public services," said Helen Miller, the director of the IFS. "Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction."
You can't have hope as your core strategy.Helen Miller, Institute for Fiscal Studies
Finding another 36 billion pounds would be equivalent to adding three percentage points to the main rate of income tax, the IFS calculates. Healey and Andy Burnham have pledged to bring down the cost of living, but the report notes they are hemmed in by more than 60 billion pounds of tax rises in Reeves's previous two Budgets and their pledge not to raise the main rates of income tax, national insurance or VAT.
The Chancellor is also under pressure to say when defence spending will reach 3 per cent of GDP. The IFS estimates that ambition would cost a further 11 billion pounds by the start of the next decade, with ministers committed to 3.5 per cent by 2035.
The report assumes inflation will average 3.1 per cent this year and 3.0 per cent in 2027, above the official March projections of 2.3 and 2.0 per cent. Growth could be revised up to 1.4 per cent this year from 1.1 per cent, but next year could be cut to 1.2 per cent from 1.6 per cent.
Higher inflation may yet flatter the numbers if it pushes up earnings and tax revenues, which the IFS says could leave Healey's fiscal headroom at about 20 billion pounds against a March estimate of 24 billion. Miller warned against relying on that. "You can't have hope as your core strategy," she said.
The warning lands as Healey makes his first trip to the IMF's annual meetings in Bangkok, where he plans to tell counterparts that major economies need credible plans to bring borrowing under control. Borrowing costs across the big economies have hit multi-decade highs on investor worries about inflation from the Middle East conflict, and Healey will meet Ukraine's finance minister Sergii Marchenko to discuss resilience.
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