Britain's leading tax and spending experts have cautioned that Chancellor John Healey's upcoming budget risks becoming a "work of fiction" unless he addresses £35bn in spending pressures caused by higher inflation and defence commitments. The Institute for Fiscal Studies said the damage from inflation meant Healey would need to either increase funding for current spending plans or accept deep real-terms cuts by the end of the decade.
Helen Miller, director of the IFS, warned that setting out spending plans the chancellor had no intention of delivering would undermine credibility with financial markets. She added that Healey should set out overall spending envelopes he would be prepared to live within, rather than delay decisions until next year's spending review.
The IFS calculated that compensating for the inflation shock and funding Healey's pledge to raise defence spending to 3% of GDP by 2030 would require tax rises or benefit cuts of about £35bn. The analysis comes as higher borrowing costs from the conflict in the Middle East are expected to significantly erode the chancellor's fiscal headroom ahead of his 28 October budget speech.
The Treasury said the chancellor remained focused on boosting business and supporting the cost of living while meeting the government's fiscal rules with a buffer against uncertainty.