Chancellor John Healey must find approximately £35bn to keep defence spending at 3 per cent of national income by 2030 and maintain health spending without cutting other public services, the Institute for Fiscal Studies warned ahead of the 28 October Budget.
The think tank said Healey has inherited departmental spending plans where growth will slow in coming years. Added pressure from conflict in the Middle East and Ukraine has driven inflation higher, squeezing those inherited budgets further. If Healey pursues all his stated goals within current spending plans, the IFS said he faces cuts of around £35bn to other services.
The government has pledged not to raise income tax, National Insurance or VAT. IFS director Helen Miller told the BBC that meeting all spending commitments through tax rises alone would be difficult. "You'd really have to be scraping around and doing lots of small things to get up to big sums," she said.
Miller added that a "steady-as-she-goes" approach is not available to the chancellor. "Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments' spending plans off course," she said.
Healey responded that his Budget "will build on this approach with fiscal discipline helping to deliver economic resilience" and give people "breathing space". He acknowledged that Middle East and European conflicts are raising global energy and mortgage costs.
The IFS expects the government to meet its self-imposed fiscal rules requiring it to borrow only for investment by 2029-30 and reduce debt as a percentage of GDP. However, the think tank forecasts this will occur with a smaller buffer of around £20bn headroom, down from £24bn predicted by the Office for Budget Responsibility at the Spring Statement.
Higher inflation will boost tax revenues but erode the real value of departments' cash budgets. The wars have also added roughly £10bn to forecasts for government debt interest payments in 2029-30.
Healey does not have to address spending totals in this Budget and could defer decisions until a Spring Statement or future Spending Review. But the IFS warned that postponing such choices would undermine confidence in the government's financial credibility. Previous chancellors have used similar tactics, pencilling in unrealistic future plans only to revise them later.
Miller cautioned that Healey's statements on fiscal discipline are a "good first start but what he needs to do is not just say he's going to cut borrowing in coming years but actually deliver on those plans". She also noted that the IFS forecasts are "exceptionally uncertain" in the current volatile environment and the official OBR forecast may differ significantly.