Chancellor John Healey could need around £35 billion in tax rises or benefit cuts to protect departmental budgets and fund higher defence spending, the Institute for Fiscal Studies has warned ahead of the October Budget.
The estimate, published on 12 October, depends on the government choosing to avoid cuts to departmental budgets while increasing defence expenditure. It is not an announced tax rise or an established shortfall in the Treasury’s accounts.
Spending choices behind the estimate
The IFS estimates that avoiding departmental budget cuts, given existing health and defence spending paths, could require around £25 billion in additional day-to-day and investment spending in 2030–31.
Raising defence expenditure to 3% of GDP by 2030 would add a further estimated £11 billion in 2030–31. These are approximate figures; the IFS describes the combined potential tax rises or benefit cuts as around £35 billion.
Higher prices reduce what fixed cash budgets can buy. The public-service spending analysis warns that slower planned spending growth, inflation and other pressures will make future departmental settlements harder to deliver.
Warning about credible plans
IFS director Helen Miller said Healey must set spending limits he would be prepared to implement. She warned that pencilling in cuts he had no intention of delivering would make the Budget “a work of fiction”.
The warning concerns the credibility of future plans, rather than a finding that the unpublished Budget contains such cuts.
Fiscal headroom remains uncertain
A separate IFS analysis illustrates a scenario in which the margin against the fiscal rules is around £20 billion in 2029–30. Higher borrowing costs and spending would be partly offset by increased tax receipts.
That calculation is highly uncertain and depends on economic forecasts, including how earnings respond to inflation. It is an IFS scenario, not the Office for Budget Responsibility’s forthcoming forecast.
Responding to the report, the Treasury said the chancellor remained focused on business, living costs and fiscal discipline. It said the OBR would publish updated forecasts alongside the Budget and declined to discuss its contents in advance.
Healey is due to present his Budget on 28 October.