The Institute for Fiscal Studies (IFS) has cautioned Chancellor John Healey that his upcoming budget could be viewed as a 'work of fiction' if it fails to outline a concrete strategy for covering £35bn in spending pressures. With the war in the Middle East causing significant strain on public finances, the thinktank emphasized that Healey must either increase funding for current government spending or implement deep real-term cuts by the end of the decade. The IFS highlighted the need for credibility in fiscal planning, warning that vague or unrealistic spending plans could undermine confidence in the government's financial strategy.
The IFS's 'green budget' report, published ahead of Healey's speech to the Commons, urged the chancellor to avoid a 'steady as she goes' approach that delays critical decisions until next year's spending review. Helen Miller, the IFS director, stressed that setting out spending envelopes that are not financially viable could damage the credibility of the fiscal rules. She pointed out that the Treasury's current assumption that all decisions can be deferred to next year risks undermining the chancellor's authority and the market's confidence.
The IFS also warned that the inflationary pressures from the Middle East conflict could significantly impact the government's ability to fund public services. While higher inflation might boost tax revenues, the overall effect could still leave a £4bn gap in the fiscal buffer. However, the thinktank cautioned that the inflation shock would force the government to make tough choices between real-term cuts, efficiency savings, or increased borrowing. Miller argued that maintaining the status quo would implicitly mean accepting cuts to public services, particularly if defence spending is increased without corresponding budget adjustments.
The IFS recommended that Healey focus on setting out overall spending envelopes that reflect his willingness to live within financial constraints, rather than deferring detailed plans to future reviews. A Treasury spokesperson reiterated the government's commitment to fiscal discipline and meeting fiscal rules, with the Office for Budget Responsibility set to release its updated forecast alongside the budget in October.