Chancellor leaves £28bn hole for next year

Britain’s leading economic thinktank declared that the government has set up a difficult fiscal environment for next year. The Institute for Fiscal Studies (IFS) stated that Chancellor John Healey failed to address a £28 billion gap in public finances. This shortfall exists to prevent a return to austerity spending levels.

Healey presented his first budget as chancellor on Wednesday. He raised taxes on banks and landlords to provide relief for households facing high energy costs. The energy price surge stems from the ongoing war in the Middle East. Despite these measures, the IFS found that the budget left a £15 billion headroom. This figure is lower than the £23.6 billion buffer left by his predecessor, Rachel Reeves. The reduction in the buffer reflects higher borrowing costs driven by the conflict.

The IFS noted that Healey kept overall departmental spending broadly unchanged in cash terms for the rest of the parliament. However, inflation fueled by the Middle East war is raising the cost of delivering public services. Helen Miller, the director of the IFS, said this situation effectively implies real-terms cuts for some public services in next year’s spending review. She estimated that avoiding austerity for unprotected departments requires a £17 billion top-up to the 2030-31 spending plans. An additional £11 billion is needed to fund the commitment to increase defense spending to 3% of GDP.

Miller described the upcoming spending review as looking pretty brutal for some departments. She warned of a clear short-term risk involving damaging speculation about tax rises next year. The IFS criticized the government for deferring important decisions. The thinktank argued that the plans to meet fiscal rules rely on cutting public spending or announcing tax increases that the public has not yet been prepared for.

The IFS called the reduction in fiscal headroom a reasonable choice given the uncertain global backdrop and grim forecasts for household living standards. However, Miller expressed skepticism about the government’s willingness to implement the necessary cuts. She stated that while delivering the implied cuts to other services is possible, she is doubtful the current administration would be willing to do it.

Labour has promised there would be no return to austerity. The government, led by Andy Burnham, is preparing for the next general election. The IFS said it appears extremely unlikely that Healey will follow through with the large cuts implied by his current fiscal position.