UK Chancellor John Healey confronts a £35 billion spending gap if he pursues pledges to raise defence spending to 3% of national income by 2030 while protecting health spending without cutting other departments, the Institute for Fiscal Studies warned.
The IFS said higher inflation driven by conflict in the Middle East and Europe will compress departmental budgets. Healey inherited spending plans where growth already slowed; the new inflationary pressure leaves him unable to meet all stated commitments without either raising taxes, cutting services, or accepting smaller increases than promised, the think tank said.
"A 'steady-as-she-goes' Budget is not an option available to the chancellor," IFS director Helen Miller said. "Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction."
Healey, who resigned as defence secretary in June over a Treasury dispute about military spending, said the Budget will show "fiscal discipline" and deliver "economic resilience" despite global pressure from Middle East and European conflicts. He faces mounting borrowing costs as government debt interest payments rise. The IFS estimates that higher inflation and bond market turbulence will add roughly £10 billion to forecasts of borrowing costs by 2029-30.
The government has ruled out raising National Insurance, income tax or VAT, limiting tax-rise options. Miller said the chancellor would have a "tough time" funding defence increases and protecting services through tax changes alone. "You'd really have to be scraping around and doing lots of small things to get up to big sums," she said.
The Budget takes place on 28 October. Healey is not obliged to address total spending figures now; he could defer such decisions until next year's Spring Statement or Spending Review, when economic conditions may differ. Previous chancellors have pencilled in unrealistic future spending plans to meet fiscal rules on the day, then revised them later.
The IFS expects Healey to meet his two fiscal rules by 2029-30 but with reduced "headroom" of around £20 billion, down from £24 billion predicted by the Office for Budget Responsibility in spring. Recent market signals suggest that smaller buffer is acceptable. The IFS also expects any household support to be temporary and limited in scale.
The think tank warns that forecasts carry exceptional uncertainty given current volatility; the official OBR forecast Healey relies on may differ significantly.