UK’s Healey can’t risk a ’steady as you go’ budget, think tank warns

British finance minister John Healey faces a challenging budget situation, with a need to find £36 billion in tax hikes or welfare cuts just to offset the impact of inflation on public services and meet a defense spending pledge, according to the Institute for Fiscal Studies (IFS). The think tank warns that a "steady-as-she-goes" budget approach would not be viable, as the tax and spending plans set out by Healey's predecessor Rachel Reeves have been significantly affected by the rise in inflation due to the Iran war.

IFS Director Helen Miller suggests that Healey and Prime Minister Andy Burnham will have to accept significant cuts to public services, either in terms of quantity or quality. The IFS notes that Healey and Burnham are limited by the strain on public finances, and by over £60 billion worth of tax hikes from the previous two budgets.

Healey and Burnham are under pressure to outline when they will raise defense spending to 3% of GDP. The IFS estimates that finding an additional £36 billion in tax would be equivalent to increasing the main rate of income tax by 3 percentage points. The research also suggests that if earnings growth and income tax revenues increase due to higher inflation, Healey's fiscal room for maneuver in the 2029/30 fiscal year is likely to decrease to around £20 billion, a slight improvement from a March estimate of £24 billion.