IFS warns budget must address £35bn spending gap or face deep cuts

Britain’s leading independent economic forecasting body has warned Chancellor John Healey that his 28 October budget must cover a £35bn spending gap. The Institute for Fiscal Studies said the chancellor must either increase departmental funding or accept deep real-terms cuts by the end of the decade.

War in the Middle East has triggered a sharp sell-off in government debt, pushing borrowing costs higher. Economists project these market moves will wipe out roughly half of the £24bn fiscal buffer left by former chancellor Rachel Reeves. Higher inflation will boost tax receipts, but debt interest costs could still add £10bn to borrowing by 2029-30.

The thinktank outlined two clear paths for the chancellor. Healey can raise taxes or cut benefits to cover the inflation shock and meet a pledge to raise defence spending to 3% of GDP by 2030. Alternatively, he can leave spending totals unchanged and accept that public service quality will fall.

Helen Miller, director of the Institute for Fiscal Studies, cautioned that delaying decisions until next year’s spending review would damage credibility. “Simply pencilling in implicit cuts that he has no intention of delivering would make the budget a work of fiction,” Miller said. This warning mirrors past criticism of former Conservative chancellor Jeremy Hunt over unrealistic spending projections before the 2024 general election.

Bank of England governor Andrew Bailey recently stressed that fiscal policy must remain credible to financial markets. A government source responded by telling the Times that Bailey should concentrate on his own responsibilities. Miller added that the Treasury cannot safely assume it can push difficult budget choices forward.

A Treasury spokesperson said, “The chancellor is fully focused on his priorities to boost business, help with the cost of living and support people in every postcode, underpinned by fiscal discipline and a commitment to meet the fiscal rules with a buffer against uncertainty.” The Office for Budget Responsibility will release updated economic forecasts alongside the budget in October. The government declined to discuss speculative proposals ahead of that publication.