IFS urges credible UK spending plans as inflation adds budget pressure

The Institute for Fiscal Studies has urged UK Chancellor John Healey to set credible public-spending totals in his October 28 budget, warning that inflation and defence ambitions could leave existing plans unable to deliver the services ministers intend.

The Guardian reported the warning as the IFS published its Green Budget analysis on October 12. The thinktank says the government could face about £35 billion in tax rises or benefit cuts if it chooses to compensate for spending pressures and fund the ambition to raise defence spending to 3% of GDP by 2030.

That is a conditional policy trade-off. The IFS’s primary release places the spending challenge in later budgets, including 2030-31; it should not be confused with the separate forecast of compliance with a fiscal rule in 2029-30.

Higher inflation erodes the purchasing power of cash allocations. Leaving totals unchanged could require departments to accept reductions in service quantity or quality, find further efficiencies or shift resources. Adding money would require choices about tax, other spending or borrowing.

IFS director Helen Miller said detailed departmental allocations did not all have to be settled at this budget. The overall spending envelopes did need to be amounts Healey would be prepared to live within, rather than implicit cuts he had no intention of delivering.

The institute urged him to make those choices now instead of deferring them to the 2027 spending review. Its concern is that plans to meet fiscal rules are only credible if the spending assumptions underpinning them are credible too.

The Guardian compared Miller’s criticism with the accusations of unrealistic spending plans directed at former Conservative chancellor Jeremy Hunt before the 2024 election. The historical comparison concerns budget assumptions, not a finding that the current government has already implemented the same choices.

Attention before the budget has focused on fiscal headroom against the rule to balance day-to-day spending with revenues in 2029-30. Former chancellor Rachel Reeves left a buffer of about £24 billion at the spring statement.

Some economists expected bond-market changes since the Middle East war began in February to remove about half the buffer. The IFS instead estimates around £10 billion of additional borrowing from debt-interest costs in 2029-30, with higher inflation-driven tax receipts offsetting part of that deterioration.

It says the net reduction in headroom could be only £4 billion. Its primary release describes a plausible scenario with around £20 billion remaining against £24 billion forecast in March, while emphasising substantial uncertainty. Changes in expected earnings alone could move headroom about £10 billion higher or lower.

Headroom is a forecast distance from the fiscal-rule limit. It is not a bank account available for spending, and a smaller-than-expected loss of that buffer does not restore the purchasing power of departmental budgets.

Bank of England Governor Andrew Bailey said fiscal policy needed to be credible to financial markets. The Guardian reported that an unnamed government source, quoted by the Times, subsequently rejected his intervention.

A Treasury spokesperson said Healey was focused on business, living costs and communities while maintaining fiscal discipline and a buffer against uncertainty. The spokesperson said the Office for Budget Responsibility would publish its updated forecast with the October budget and declined to comment on speculation about its contents.