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

UK Chancellor John Healey needs to find £35 billion to fund defence spending increases and health commitments without cutting other departments, the Institute for Fiscal Studies warned ahead of his first Budget on October 28.

The IFS, an influential independent research organisation, said Healey faces a stark choice. He can raise defence spending to 3% of national income by 2030 and lift health spending only by accepting cuts elsewhere, raising taxes, or combining both approaches.

Higher inflation driven by conflict in the Middle East and Ukraine has worsened the fiscal picture. Inflation erodes the real value of departmental budgets even if cash allocations stay flat. The IFS estimates inflation and higher bond market turbulence will add around £10 billion to government borrowing costs by 2029-30.

IFS director Helen Miller told the BBC that Healey inherited spending plans where departments already faced implicit cuts. "A 'steady-as-she-goes' Budget is not an option available to the chancellor," Miller said. "Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction."

Healey said his Budget "will build on this approach with fiscal discipline helping to deliver economic resilience" and give people "breathing space" from high prices and mortgage costs. He acknowledged that Middle East and European conflicts are pushing energy prices and borrowing costs higher across allied economies.

The government has boxed itself in on taxes. Labour's manifesto pledges rule out raising National Insurance, income tax or VAT. Miller said meeting all spending commitments through tax increases alone would require "lots of small things" across multiple revenue sources, a politically difficult path.

The IFS expects Healey will meet the government's self-imposed fiscal rules by 2029-30. However, the buffer of spare borrowing capacity (known as headroom) will shrink to around £20 billion from the £24 billion the Office for Budget Responsibility predicted in spring. Financial markets have shown comfort with that reduced cushion.

Healey does not need to set out detailed spending totals in this Budget and could delay such decisions to a Spring Statement or Spending Review next year when economic forecasts may clarify. But the IFS warned that dodging the issue risks damaging government credibility.

The IFS flagged exceptional uncertainty around its forecasts given current volatility. The official OBR forecast that Healey will rely on may reach different conclusions about the scale of the fiscal challenge.