Key facts
- UK Chancellor John Healey faces a £36 billion fiscal gap in his upcoming budget.
- Inflation and the Iran war are key drivers of the increased fiscal gap.
- The Institute for Fiscal Studies (IFS) warned that a "steady-as-she-goes" budget is not an option.
- Higher inflation could increase the cost of benefits, public sector pensions, and government debt interest payments.
- The IFS cautioned Healey against making spending announcements he has no intention of honouring.
- The government is under pressure to show financial markets it has a tight grip on finances as borrowing costs rise.
UK Chancellor John Healey faces a significant fiscal challenge in his upcoming budget, with the Institute for Fiscal Studies (IFS) warning of a £36 billion hole. This gap is primarily driven by the impact of persistent inflation, exacerbated by global conflicts like the US-Israel war in Iran and Russia's invasion of Ukraine, on public spending.
The IFS estimates that higher inflation could increase the cost of benefits, public sector pensions, and government debt interest payments. Specifically, benefits spending alone could cost an extra £1.7 billion, public sector pensions £700 million more, and government debt interest payments up to £2.3 billion this year.
These rising costs have significantly eroded the government's fiscal headroom, which the IFS expects to be around £20 billion, a reduction from previous forecasts. The think tank cautioned Healey against making unrealistic spending plans or "pencilling in implicit cuts that he has no intention of delivering," stating that a "steady-as-she-goes" budget is not an option.
Healey acknowledged that global conflicts are leading to higher prices and stated his Budget "will build on this approach with fiscal discipline helping to deliver economic resilience" and give people "breathing space". However, the government is under pressure to demonstrate financial control as borrowing costs rise.