IFS warns Healey's Budget at risk from global conflicts

Chancellor John Healey is facing a major challenge in shaping his first Budget, as the war in Iran and ongoing conflict in Ukraine drive up inflation and borrowing costs across the UK, according to the Institute for Fiscal Studies (IFS) ^[1]. The IFS warned that higher-than-expected inflation could erode departmental spending plans, forcing Healey to choose between tax rises, spending cuts, or both.

The IFS cautioned against relying on 'pencilled-in' future cuts that the government has no intention of delivering, calling such a strategy a 'work of fiction' ^[1]. It predicts that the government may need an extra £25bn by 2029-30 just to keep pace with inflation, before even accounting for increased defence spending.

Although higher inflation is boosting tax revenues, it is also reducing the real value of departmental budgets, undermining fiscal credibility if not addressed ^[1]. The IFS expects the government to meet its self-imposed fiscal rules—limiting borrowing to investment by 2029-30 and reducing debt as a share of GDP—but only with a narrower £20bn 'headroom' than the £24bn forecast by the Office for Budget Responsibility (OBR) at the Spring Statement.

The war in the Middle East and Russia’s invasion of Ukraine have contributed to rising energy prices, which are being passed on to consumers through higher pump prices and mortgage costs ^[1]. These factors have also increased the cost of government borrowing, adding around £10bn to projected interest payments by 2029-30.

Healey, speaking ahead of the IMF meeting, said the UK and its allies must respond to global instability with fiscal discipline to deliver 'economic resilience' and 'breathing space' for households ^[1]. However, the IFS warned that a 'steady-as-she-goes' Budget is not viable, as inherited spending plans risk falling behind inflation within a few years.

While the government may delay major spending decisions until next year’s Spring Statement or Spending Review, the IFS stressed that failing to address the issue now could damage long-term fiscal credibility. The story was first reported by BBC News.