Rampant inflation could land Healey with £35bn bill, IFS warns
Soaring inflation could force the Chancellor to commit to more government spending, posing a worse Budget headache than a narrowing fiscal headroom, a top think tank has warned. John Healey might have to top up department budgets by as much as £35bn by the end of the decade to stop the real-terms value of spending [...]
A top think tank has warned that soaring inflation could force Chancellor Jeremy Healey to commit to additional government spending, creating a more significant budget challenge than a reduced fiscal headroom, according to the Institute for Fiscal Studies (IFS). Healey may need to increase departmental budgets by up to £35 billion by the end of the decade to prevent the real-terms value of spending from being eroded by rampant inflation, the IFS stated.
The Chancellor has been warned that rising borrowing costs could cause his fiscal headroom to nearly disappear, but the IFS claims that inflation poses a more significant issue. Higher interest rates on government debt would push up borrowing by roughly £10 billion in 2029-30, though much of this would be offset as increasing inflation drives up tax revenues.
Consequently, the government's fiscal headroom could be around £20 billion in 2029-30, compared to the initial £24 billion forecast in March. The IFS contends that Healey must address the real-terms erosion of departmental budgets resulting from inflation at this month's Budget by either accepting budget cuts or committing to increased spending to avoid cuts.
If Healey chooses to boost departmental budgets, this might necessitate tax increases or benefit reductions of about £35 billion, as per the IFS's projections. Otherwise, "His plan for meeting fiscal rules will not be credible," the IFS warns. IFS director Helen Miller emphasized that the Chancellor should present overall spending envelopes he is genuinely prepared to adhere to.
If Healey opts for public spending reductions, he should be honest about the tough years ahead for some public services. The IFS' warning about Healey's fiscal credibility comes as the Chancellor prepares to meet finance ministers from around the world at an IMF summit in Bangkok. Healey aims to demonstrate to the UK's allies that the government is dedicated to curbing borrowing even as the Middle East conflict prompts calls for more spending on cost of living support.
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