Higher prices linked to the US and Israeli war against Iran are making it harder for the UK government to prepare its Budget, the Institute for Fiscal Studies (IFS), which analyses public finances, has warned. According to the BBC, the institute believes inflation could leave the government facing a choice between spending cuts, tax rises or a combination of both. That does not mean specific cuts or tax changes have already been announced.
The problem is that when prices rise faster than expected, the money allocated to government departments buys less. Keeping spending at the same cash level does not necessarily preserve its value in real terms. The IFS estimates that maintaining that value could require an additional £25 billion in the 2029–30 financial year, even before ambitions to increase defence spending are taken into account.
For people living in the UK, this is an important distinction: the warning concerns pressure on future taxes and funding for public services, rather than changes to household bills that have been passed into law or an announced programme of cuts.
Higher borrowing costs, less room for manoeuvre
Inflation is not the only source of pressure. According to the BBC’s report, the IFS estimates that inflation and turbulence in the bond market will increase the government’s forecast borrowing costs by around £10 billion in the 2029–30 financial year. This is an estimate of future costs, not additional spending already incurred.
The institute still expects the government to meet its fiscal rules — the principles setting the framework for managing the public finances. However, its margin of safety would be around £20 billion, compared with the £24 billion forecast by the Office for Budget Responsibility (OBR), the UK’s independent fiscal forecaster, at the Spring Statement, the government’s spring update on the economy and public finances.
The IFS also stresses the unusually high level of uncertainty surrounding its forecasts in an unstable economic environment. The OBR’s official forecast could lead to different conclusions. These figures should therefore not be treated as settled costs or a ready-made Budget plan.
A call for credible plans, not distant promises of cuts
IFS director Helen Miller is calling for credible spending plans. She warns against building future cuts into forecasts when the government does not actually intend to carry them out. The warning is therefore not just about how much is spent, but whether the assumptions behind the plans can be delivered.
The BBC reports that Chancellor John Healey is preparing his first Budget, with the statement scheduled for 28 October. He has pledged fiscal discipline and measures to give households financial breathing room. The Treasury declined to comment on rumours and speculation.
According to the BBC, however, the Chancellor does not have to settle overall spending levels in this Budget and could defer those decisions to later fiscal events. The IFS also expects any support for households to be temporary and limited. That is the institute’s assessment, not an announcement of a government support scheme.
