Chancellor John Healey faces having to find £35bn to avoid cuts to public spending while meeting defence promises in his first Budget, an influential think tank has warned.
The Institute for Fiscal Studies (IFS) said that if the government wants to raise defence spending to 3% of national income by 2030 and lift health spending without squeezing other departments, it will need a “top-up” of billions of pounds.
Higher inflation, caused by the Iran war, could eat into what the government hoped to spend on public services, meaning Healey will have to choose between spending cuts, tax rises, or a mixture of both, the IFS said.
The Treasury declined to comment.
The government is under growing pressure to show financial markets that it has a tight grip on finances as the cost of borrowing rises.
The IFS said that Healey must set out “credible” spending plans in the Budget, which will take place on 28 October.
“A ‘steady-as-she-goes’ Budget is not an option available to the chancellor,” said IFS director Helen Miller.
“Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments’ spending plans off course.
“Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction,” she added.
Speaking ahead of the annual International Monetary Fund meeting this week, Healey said: “The consequences of conflict in the Middle East and Europe are hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home.
“But Britain and our allies can face up to these challenges together.”
He said his Budget “will build on this approach with fiscal discipline helping to deliver economic resilience” and give people “breathing space”.
Miller told the BBC’s Today programme that Healey had inherited spending plans for government departments where spending growth would slow in the coming years.
“[It] already looked likely that he would have to make spending cuts just to live within those,” she said. “Now, along comes the Middle East war, inflation goes up and those spending plans look very tight indeed.”
Added to that, the chancellor has said he wants to get defence spending up to 3% of national income. Under Keir Starmer’s leadership, Healey resigned as defence secretary in June in a battle with the Treasury over military spending.
Miller said: “You put all that together, if he wanted to do all of that within current spending plans he’s looking at having to cut some other services by something like £35bn.”
She said the government would have a “tough time” if it wanted to raise taxes to stop cuts to departments and fund defence spending.
Former chancellor Rachel Reeves announced billions of pounds in tax rises. Meanwhile, Labour pledged in its manifesto “not increase taxes on working people”, ruling out rises to National Insurance, income tax or VAT. Prime Minister Andy Burnham has said he will stick to that promise.
Miller said: “You’d really have to be scaping around and doing lots of small things to get up to big sums.”