Higher energy prices stemming from the US-Israel war in Iran and Russia's invasion of Ukraine pose a budget challenge for UK Chancellor John Healey as he prepares his first Budget on 28 October, the Institute for Fiscal Studies warned.
The IFS said inflation driven by global conflicts could eat into government spending plans for public services, forcing Healey to choose between spending cuts, tax rises, or a combination of both. The think tank urged the government to make credible spending commitments rather than proposing unrealistic future cuts to balance the Budget.
Healey acknowledged the pressures in remarks ahead of an International Monetary Fund meeting, saying conflict in the Middle East and Europe "are hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home." He said his Budget would use "fiscal discipline" to deliver "economic resilience" and give people "breathing space."
The IFS director Helen Miller said a "steady-as-she-goes" approach was not viable. "Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments' spending plans off course," Miller stated. "Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction."
The conflicts have raised UK government debt interest payments, adding pressure on the Treasury. While higher inflation will boost tax revenues, it erodes the purchasing power of departments' cash budgets, the IFS explained.
The think tank expects around £10 billion in additional borrowing costs by 2029-30 due to recent bond market turbulence and higher inflation. It predicts the government will still meet its fiscal rules requiring only borrowed funds for investment by 2029-30 and reducing debt as a share of GDP, but with a narrower buffer of around £20 billion compared to the £24 billion predicted by the Office for Budget Responsibility at the Spring Statement.
The IFS estimates the government may need to find an extra £25 billion in 2029-30 to maintain departmental budgets amid inflation, before accounting for plans to raise defence spending. Raising that amount would suggest significant tax increases.
The think tank cautioned that spending plans inherited from previous Chancellor Rachel Reeves could leave some departments' budgets unable to keep pace with inflation within years. The IFS warned that failing to address this would undermine credibility of government plans. However, it acknowledged forecasts remain "exceptionally uncertain" given current volatility.