UK: IFS says budget will be "a fiction" without a plan to cover £35 billion of spending pressures

A warning ahead of the October 28 budget

Britain's leading experts on taxation and public spending have warned John Healey that his budget risks being "a fiction" if it does not set out a plan to cover £35 billion of spending pressures. That is what The Guardian reports, citing the pre-budget report of the Institute for Fiscal Studies (IFS), published on October 12, 2026.

According to the IFS, the damage caused by higher inflation, in the context of the war in the Middle East, would leave the chancellor with a choice: either boost the funding for his current spending plans, or impose sharp real-terms cuts by the end of the decade. The think tank believes that failing to address the issue in the October 28 budget could give the impression that the Labour Party is setting unrealistic spending plans.

"A fiction": the IFS message

Helen Miller, the IFS director, said that writing down implicit cuts that the chancellor has no intention of delivering would make the budget a fiction. The Guardian notes that this criticism echoes the one aimed at Jeremy Hunt, the former Conservative chancellor, who was accused before the 2024 general election by the then head of the Office for Budget Responsibility of setting unrealistic spending plans.

In its report, the IFS asks John Healey to avoid a "steady as she goes" budget that would postpone decisions until next year's spending review. The think tank writes that if the chancellor sets envelopes for public services that he would not be prepared to honor, his plan to comply with the fiscal rules will not be credible.

According to Helen Miller, the Treasury's assumption that everything can be deferred to next year's spending review risks undermining the chancellor's credibility. She argues for a chancellor who hopes for the best but plans for the worst.

Headroom and borrowing costs

According to The Guardian, pre-budget attention has focused mainly on the chancellor's headroom against Labour's main fiscal rule, which aims to balance current spending and revenue by 2029-30. The war in the Middle East is fueling a sharp sell-off in the public debt market, and higher borrowing costs are expected to wipe out a large part of the £24 billion buffer left by former chancellor Rachel Reeves at the spring statement.

Leading economists cited by the newspaper predict that market moves since the war began in February could eliminate about half of that headroom, fueling concern at the Treasury about a possible market reaction.

The IFS adds a nuance: higher interest charges could add £10 billion to borrowing in 2029-30, but the state would benefit from higher tax revenues thanks to inflation. The chancellor's headroom would therefore shrink by only £4 billion. The think tank nonetheless warns against focusing on this buffer, because the inflation shock also weighs heavily on the funding plan for public services.

The inflation shock on public services

According to the IFS, inflation erodes the purchasing power of public spending and forces the government to choose: accept real-terms cuts and seek efficiency gains, or top up departmental budgets, either through tax rises or through more borrowing. Leaving spending totals unchanged in the budget would amount to implicitly accepting a decline in the quality or quantity of public services.

The think tank puts at roughly £35 billion the tax rises or benefit cuts needed to offset the inflation shock and fund John Healey's commitment to raise defense spending to 3% of GDP by 2030. According to Helen Miller, keeping the inherited tax and spending plans would mean letting inflation derail departmental budgets, and tolerating severe cuts, larger if defense were increased within existing totals. She notes that the chancellor would not need to detail the next spending review period, only to set overall envelopes he would be prepared to honor.

Tensions with the Bank of England and the Treasury's response

The Guardian reports that Bank of England Governor Andrew Bailey said last week that fiscal policy had to be credible and be seen as credible by financial markets. The next day, The Times cited a government source saying Andrew Bailey should focus on his own job.

A Treasury spokesperson replied that the chancellor is fully focused on his priorities: supporting businesses, helping with the cost of living and supporting people in every part of the country, with fiscal discipline and a commitment to meet the fiscal rules with headroom to account for uncertainty. He added that the Office for Budget Responsibility will publish its updated forecasts alongside the budget, and that the Treasury will not comment on rumors or proposals about their content before then.

Analysis

The reporting by The Guardian shows that the IFS is shifting the debate: beyond the £24 billion headroom, it puts the emphasis on the credibility of spending envelopes. According to the think tank, this issue matters more than the limited erosion of headroom, estimated at £4 billion, when judging the credibility of the October 28 budget.