Healey's First Budget Faces a £35bn Gap
The Institute for Fiscal Studies has warned Chancellor John Healey that his Budget on 28 October risks being a "work of fiction" unless he explains how to cover £35bn in spending pressures. The Guardian
The warning came in the IFS "green budget" report on the public finances before Healey's speech to the Commons. It is his first Budget as chancellor. The Budget is scheduled for 28 October.
Labour's main fiscal rule is to balance day-to-day public spending with revenues in 2029-30. In practice, taxes must pay for regular costs such as staff pay and services. Former chancellor Rachel Reeves left a £24bn buffer, or spare room, against that rule at the spring statement. Think of it like spare room in a household budget.
The IFS estimated higher debt interest costs, the price the government pays to service its borrowing, could add £10bn to borrowing in 2029-30. It said higher inflation pushing up tax revenue would limit the cut to that buffer to £4bn. The Institute forecasts government debt interest spending at £111 billion. IFS
The IFS said higher inflation meant Healey would need to either add funds to current spending plans or impose deep real-terms cuts by the end of the decade. Real-terms means after accounting for rising prices. It said if Healey sets out spending envelopes, or planned limits for public services, that he would not be willing to keep to, his plan for meeting the fiscal rules will not be credible.
IFS director Helen Miller said "simply pencilling in implicit cuts that Healey has no intention of delivering would make the budget a work of fiction." The IFS urged Healey to avoid a "steady as she goes" budget that delayed decisions until next year's spending review, when longer-term department budgets are set.
Bank of England governor Andrew Bailey said fiscal policy "must be credible and be seen as such by financial markets". The Financial Times reported that Healey could lose confidence among bond investors, who lend to the government by buying its debt, if he does not explain how he will fill a £35bn budget hole. Financial Times
A global bond selloff sent the UK government's cost of borrowing higher ahead of the Budget. The stock of UK government debt has grown consistently over the last 25 years. UK government debt is not forecast to fall substantively over the next five years.
The Office for National Statistics revised up borrowing for each of the previous four months of the 2026/27 financial year. Reuters
Healey did not rule out tax rises in the Budget. He said Britain's "inexorably rising welfare bill must be controlled". He is considering extending a mansion tax to properties worth more than £1.5 million, down from a current threshold of £2 million. Reuters
The Conservatives urged Chancellor John Healey to rule out tax rises in the Budget. iNews
The Institute for Fiscal Studies warned that war involving Iran threatens Healey's Budget plans. BBC
The broader context here is a chancellor caught between arithmetic and politics. Debt interest takes up fiscal space before any policy choice is made. Inflation lifts revenues on paper while raising the cost of maintaining services in real terms. Credibility with gilt investors, who buy UK government debt, depends less on a single number for headroom than on whether spending assumptions hold when put into practice.
Looking at what this means for 28 October, the decision is whether to price the pressure now. Deferring detailed spending envelopes to next year's spending review would preserve short-term flexibility. It would leave the fiscal rule resting on unspecified restraint. Pricing it now would require tax measures, welfare control, or explicit real-terms reductions that carry political cost. Markets will read the choice as a signal of intent, not only accounting.
