IFS Warns Healey Must Find £35bn to Avoid Public Service Cuts While Meeting Defence Pledge

Chancellor John Healey is confronting a budget shortfall of approximately £35bn if he intends to honour the government's defence commitments without cutting into other public services, according to a warning issued by the Institute for Fiscal Studies (IFS).

The influential think tank said that raising defence spending to 3% of national income by 2030, while simultaneously increasing health funding and protecting other departments from real-terms reductions, would require a substantial "top-up" of billions of pounds that has not yet been identified.

The IFS cautioned that higher inflation, driven in part by the conflict involving Iran, is eroding the value of the cash budgets already allocated to government departments. As a result, Healey faces a difficult trilemma: he must choose between spending cuts, tax rises, or some combination of the two in order to balance the books.

The Treasury declined to comment on the IFS's assessment when approached by reporters.

Pressure on the chancellor has been mounting as the cost of government borrowing continues to rise, with financial markets watching closely for signs that the UK maintains a tight grip on its public finances. The IFS stressed that Healey must present "credible" spending plans when he delivers his first Budget on 28 October.

"A 'steady-as-she-goes' Budget is not an option available to the chancellor," said IFS director Helen Miller. She warned that adhering to inherited tax and spending plans would allow inflation to "blow departments' spending plans off course," adding that pencilling in implicit cuts he has no intention of delivering would turn the Budget into "a work of fiction."

Speaking ahead of the annual International Monetary Fund meeting this week, Healey acknowledged the global economic strain caused by conflicts. "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," he said. "But Britain and our allies can face up to these challenges together."

The chancellor added that his Budget "will build on this approach with fiscal discipline helping to deliver economic resilience" and would give people "breathing space."

Miller, appearing on the BBC's Today programme, explained that Healey had inherited departmental spending plans under which spending growth was already scheduled to slow in the coming years. Even before the recent surge in inflation, it appeared likely that cuts would be necessary just to remain within those limits, she said.

"Now, along comes the Middle East war, inflation goes up and those spending plans look very tight indeed," Miller noted. She added that the chancellor's stated ambition to lift defence spending to 3% of national income compounds the problem. Healey had resigned as defence secretary in June under Keir Starmer's leadership following a dispute with the Treasury over military funding.

Miller calculated that if Healey attempted to achieve all of these objectives within existing spending envelopes, he would need to cut other services by roughly £35bn. She also suggested the government would face a "tough time" if it sought to raise taxes to avoid departmental cuts and finance defence. Former chancellor Rachel Reeves had already announced billions in tax increases, and Labour's manifesto committed to not raising taxes on working people, explicitly ruling out increases to National Insurance, income tax, or VAT. Prime Minister Andy Burnham has said he will honour that pledge.

"You'd really have to be scaping around and doing lots of small things to get up to big sums," Miller said, indicating the limited room for manoeuvre on revenue-raising.

The chancellor is not obliged to address spending totals in this Budget and could defer such decisions to future events, such as next year's Spring Statement or a Spending Review, by which point the economic outlook might have shifted. However, the IFS cautioned that postponing these choices would raise doubts about the credibility of the government's fiscal strategy. Past chancellors have similarly pencilled in unrealistic future spending plans to satisfy fiscal rules on the day, only to revise them later.

Miller described Healey's emphasis on fiscal discipline as a "good first start," but stressed that "what he needs to do is not just say he's going to cut borrowing in coming years but actually deliver on those plans."

The economic backdrop has been shaped by the US-Israel war against Iran and Russia's invasion of Ukraine, both of which have contributed to elevated energy prices worldwide. These higher costs have filtered through to consumers via more expensive goods on shelves and at fuel pumps. The conflicts have also pushed up the interest payments on UK government debt, intensifying the pressure on the chancellor.

Although rising inflation boosts tax revenues, the IFS pointed out that it simultaneously erodes the real value of departments' cash budgets. Like other analysts, the IFS expects recent turbulence in bond markets and higher inflation to add around £10bn to forecasts for the government's borrowing costs in 2029-30.

Despite these challenges, the IFS still anticipates that the government will meet its self-imposed fiscal rules—borrowing only for investment projects by 2029-30 and reducing debt as a share of GDP—largely because inflation lifts tax receipts. However, it expects those rules to be met with a smaller buffer, or "headroom," of roughly £20bn. That is below the £24bn buffer projected by the Office for Budget Responsibility at the time of the Spring Statement.

Recent market signals suggest that investors would be comfortable with that reduced level of headroom. The IFS also expects any "breathing space" offered to households to be temporary and limited in scope. It warned, however, that in such a volatile environment, its forecasts remain exceptionally uncertain, and the official forecast from the OBR may differ.