LONDON, Oct 12 (Reuters) – British Finance Minister John Healey is expected to confront a substantial financial challenge in his upcoming budget as he seeks to find £36 billion ($47.6 billion) through tax increases or welfare cuts. This figure is necessary to mitigate the inflationary pressures on public services and meet a commitment to increase defense spending, according to the Institute for Fiscal Studies (IFS).
The IFS cautioned that a “steady-as-she-goes” budget scheduled for October 28 is not a viable strategy. Healey’s predecessor, Rachel Reeves, outlined tax and spending plans that have now been significantly affected by inflation rises linked to the ongoing conflict in Iran. The IFS warned that failing to adjust these financial plans might undermine their credibility with investors.
“It would be a choice to tolerate chunky cuts to the quantity or quality of some public services,” stated IFS Director Helen Miller.
Healey and Prime Minister Andy Burnham have pledged to address the rising cost of living but face constraints due to over £60 billion in tax hikes enacted in Reeves’ last two budgets. They are also under pressure to clarify when they will increase defense spending to 3% of GDP.
To raise £36 billion, the government would need to implement tax increases that amount to an additional 3 percentage points on the main rate of income tax. Although Healey and Burnham intend to honor commitments made by the previous government not to raise the main tax rates, they are anticipated to explore alternative revenue sources.
The government is also tasked with curbing escalating welfare expenditures, which have surged in light of increased borrowing costs since the start of conflicts in the Gulf. The IFS report suggests that if government budget forecasters determine that inflation will lead to elevated earnings growth, it could potentially improve income tax revenues, providing some fiscal leeway. This could result in Healey’s projected fiscal headroom declining modestly to £20 billion, down from £24 billion earlier estimated in March.
While these numbers remain low relative to historical trends, they exceed some analysts’ forecasts that estimate only £12 billion. The IFS predicts inflation will average 3.1% this year and 3.0% in 2027, surpassing earlier official projections of 2.3% and 2.0%. Additionally, anticipated economic growth this year may be adjusted upward to 1.4% from an initial estimate of 1.1%, although projections for next year may decrease to 1.2% from 1.6%.
Given these financial dynamics, Healey might opt to postpone major adjustments to fiscal plans until a Spending Review in 2027, when circumstances could change. Miller warned, however, that investors worldwide, who have recently driven up government debt yields, may not be willing to wait, stating, “You can’t have hope as your core strategy.”
