John Healey has been warned by Britain's leading tax and spending experts that his first Budget risks being dismissed as a "work of fiction" unless he sets out credible plans to cover around 35 billion pounds in spending pressures bearing down on the public finances.
Publishing its influential green budget analysis on Monday, sixteen days before the Chancellor addresses the Commons, the Institute for Fiscal Studies said the damage done by higher inflation left Mr Healey with an unpalatable choice: top up the money available for his current spending plans, or preside over deep real-terms cuts to public services by the end of the decade.
A buffer washed away
Against a febrile backdrop in the bond market, the think tank warned that failure to address the problem on 28 October would risk leaving the impression that Labour was setting unrealistic spending plans. The war in the Middle East has fuelled a dramatic sell-off in the market for government debt, and higher borrowing costs are expected to erase a significant chunk of the 24 billion pound buffer left by the former chancellor Rachel Reeves at the spring statement.
Attention before the Budget has largely focused on the hit to the Chancellor's headroom against Labour's main fiscal rule, which requires day-to-day public spending to be matched by revenues in 2029-30. Analysts at KPMG estimate the cushion has already shrunk from 23.6 billion pounds, as calculated by the Office for Budget Responsibility in March, to around 12 billion pounds, after 30-year gilt yields hit their highest level since 1998 last week.
The IFS Green Budget at a Glance
- The IFS says the 28 October Budget risks being a "work of fiction" without plans to cover 35 billion pounds of spending pressures.
- Higher inflation forces a choice between topping up spending plans and deep real-terms cuts by the end of the decade.
- The gilt market sell-off is expected to erase much of the 24 billion pound buffer left at the spring statement.
- The think tank warns against a "steady as she goes" Budget that defers decisions to next year's spending review.
- Labour's main fiscal rule requires day-to-day spending to be matched by revenues in 2029-30.
No hiding behind the spending review
The IFS called on the Chancellor to avoid a holding statement that pushes the hardest choices into next year's spending review, where ministers hope the Milburn and Timms reviews into welfare will help them counter opposition attacks on the benefits bill. Treasury sources have signalled a low-key Budget centred on energy bills, small business support and fiscal devolution, but Monday's report makes clear that doing too little carries its own risks for market confidence.
Mr Healey used a weekend television interview to call for a restoration of confidence about Britain, while refusing to rule out tax rises. He blamed extreme pressures in the wider market, the energy shock that followed the Iran war and what he called 14 years of Conservative misrule for the historic high borrowing costs confronting his first Budget.
Whatever the political framing, the arithmetic is now unforgiving. The Chancellor has sixteen days to decide whether to raise revenue, trim spending plans or test the patience of a bond market that has already pushed the state's long-term borrowing costs to levels unseen in almost three decades.