John Healey’s budget minimum wage rise debate has been overtaken by a bigger warning from the Institute for Fiscal Studies: his first budget leaves a £28bn shortfall in the public finances. The IFS says that gap could push next year’s spending review into a hard choice between cuts, tax rises or both.
Helen Miller, the institute’s director, said avoiding a return to austerity for unprotected government departments could require a £17bn top-up to the spending plans for 2030-31, plus another £11bn to meet the commitment to raise defence spending to 3% of GDP. Healey raised taxes on banks and landlords in the budget on Wednesday and left overall departmental spending broadly unchanged in cash terms.
Helen Miller on £28bn
Miller said the budget effectively leaves some public services exposed to real-terms cuts when next year’s spending review is set. She said, “It effectively implies that some public services will see real-terms cuts in next year’s spending review.”
The IFS said that with spending plans left broadly flat in cash terms, inflation can still raise the cost of delivering services. A cash freeze does not buy the same amount next year if prices rise, so departments can receive the same pounds but less purchasing power.
Rachel Reeves buffer
The £15bn headroom Healey kept came after a hit to the £23.6bn buffer left by Rachel Reeves. The IFS described his choice to allow a modest reduction in headroom as a reasonable choice, but it also said the budget had ducked several big decisions.
Healey said his budget was designed to fund relief for households being squeezed by the energy shock emanating from the Middle East war. The conflict drove up the UK government’s borrowing costs, which fed into the tighter fiscal room he had to manage.
Spending review choices
Miller said the pressure may not stop with one round of cuts and top-ups. “A clear short-term risk with the chancellor’s choices is that next year – with low headroom and a spending review that looks pretty brutal for some departments – we see another season of damaging speculation about tax rises.”
She added, “My concern is not that it would be impossible to deliver the implied cuts to other services – that could be done. But I’m sceptical that this government would be willing to do it.” That leaves next year’s spending review as the point where the budget’s cash choices turn into actual service levels, and the departments without protection are the ones most exposed.
