Public Finances: IFS Warns of Brutal Spending Cuts Ahead

Chancellor John Healey’s debut budget leaves a £28bn shortfall in the public finances, a gap that the Institute for Fiscal Studies (IFS) says will likely force painful cuts to government departments next year. The thinktank describes the upcoming spending review as brutal for unprotected services.

The IFS argues that Healey’s tax and spending statement failed to cover the necessary costs to avoid a return to austerity. By keeping overall departmental spending broadly unchanged in cash terms, the chancellor has effectively planned for large reductions in the run-up to the next general election. This approach comes as the war in the Middle East drives up inflation and raises the cost of delivering public services.

Helen Miller, director of the IFS, stated that avoiding austerity for unprotected departments could require a £17bn top-up to the 2030-31 spending plans. This figure does not include an additional £11bn needed to fund the government's commitment to increase defence spending to 3% of GDP. Miller noted that this structure implies real-terms cuts for some public services in next year’s review.

The IFS pointed out a clear short-term risk in Healey’s choices. With low headroom and a spending review that appears harsh for some departments, the thinktank warned that the market may see another season of damaging speculation about tax rises. This volatility is a concern given the febrile state of bond markets that influenced the design of the budget speech.

Healey’s budget, delivered on Wednesday, raised taxes on banks and landlords. These measures were intended to fund relief for households squeezed by the energy shock from the Middle East conflict. The chancellor adhered to the government’s fiscal rules, retaining £15bn of headroom. This allowed for a reduction in the £23.6bn buffer left by his predecessor, Rachel Reeves, as borrowing costs rose.

The IFS characterized the modest reduction in headroom as a reasonable choice given the uncertain global backdrop. However, the thinktank criticized the deferral of important decisions to next year. Miller expressed skepticism that the Labour government, having promised no return to austerity, would be willing to deliver the implied cuts to other services.

The analysis suggests that while the cuts are technically possible, the political will to implement them is questionable. The current structure relies on either cutting public spending or announcing tax increases that the public has not yet been prepared for. This sets up a challenging environment for the government as it prepares for the next election.