IFS says Healey faces possible £35bn spending challenge at October Budget

The Institute for Fiscal Studies said on 12 October that Chancellor John Healey could face a roughly £35bn annual spending challenge by 2030–31 if the government pursues higher defence and health spending while protecting other departments and covering pay pressures. The estimate, published ahead of the UK Budget on 28 October, describes a possible set of choices for public services, not an agreed bill or a government spending commitment.

The think tank's Green Budget analysis says inflation is reducing what departments can buy with their existing cash budgets. At the same time, the government faces competing ambitions for health and defence. The question for the Budget is whether its overall spending plans can accommodate those pressures, or whether ministers will change their ambitions, find more money or ask departments to make savings.

How the IFS reaches its £35bn estimate

The £35bn figure applies to spending in 2030–31 under a particular combination of assumptions. The IFS models defence spending reaching 3% of national income, health spending rising by 2.7% a year after inflation, and no real-terms cuts to other departments. It estimates that combination would require about £20bn more in 2030–31 than currently planned, before accounting for further pressures linked to public-sector pay and productivity.

Allowing for those plausible pay and productivity pressures adds about £15bn to that scenario, producing the roughly £35bn total. The IFS says these calculations illustrate choices rather than forecast an unavoidable funding gap. Its different scenarios can overlap or represent alternatives, so their figures should not be added together indiscriminately.

What existing spending plans could mean for other departments

The pressure would fall on departments outside health and defence if total spending plans stayed fixed. With health spending growing by 2.7% annually in real terms and defence held at 2.7% of GDP, the IFS estimates those other departments could face average real-terms cuts of 0.9% a year from 2027–28 to 2030–31. If defence instead rose to 3% of national income by 2030–31, its estimate for those cuts increases to 2.0% a year.

Those are conditional estimates, not announced cuts to particular services. Nuffield Foundation welfare director Mark Franks said inflation can diminish the services that fixed cash budgets purchase, potentially affecting their quality and availability. He also noted that frozen tax thresholds can draw more people into higher tax bands as incomes rise. The precise effect on any service or household depends on future policy and economic conditions.

Why the Budget forecast remains uncertain

The IFS says inflation can raise tax revenues while also increasing pressure on departments and debt costs. It estimates that higher government debt interest could add roughly £10bn to borrowing in 2029–30. In one plausible scenario, it puts the Chancellor's margin against his fiscal rule at about £20bn that year, compared with £24bn in the March forecast. The institute stresses that uncertainty is high: different earnings assumptions alone could change its estimate by about £10bn in either direction.

IFS director Helen Miller warned that a ‘steady-as-she-goes’ Budget would leave the spending pressures unresolved. She said pencilling in cuts the government had no intention of delivering would make the Budget ‘a work of fiction’. Miller said Healey does not need to settle every department's detailed allocation this month, but should set overall spending limits he would be prepared to follow. Scaling back ambitions or making them conditional on the economy are among the options she identified.

What happens at the 28 October Budget

The Guardian reported that the Treasury said Healey was focused on business, cost-of-living support and fiscal discipline, while declining to comment on proposals before the Budget. The Office for Budget Responsibility is due to publish an updated forecast alongside it. That forecast could differ materially from the assumptions behind the IFS illustrations.

Detailed departmental choices may be left to a later Spending Review, according to the IFS, but the institute argues that the 28 October Budget should still establish credible overall totals. The government could ask departments to absorb pressures, shift priorities, scale back spending ambitions, raise taxes, reduce other spending or borrow. Which route it takes, and whether anything approaching the illustrated £35bn is provided, remains open.