Iran war threatens Healey's Budget plans, think tank warns
IFS warns Chancellor John Healey's Oct 28 Budget faces pressure from inflation and Middle East conflict, adding £10bn to borrowing costs.
Stock photo for illustration only, not from the actual event
- US-Israel war in Iran drives up global energy and consumer prices
- IFS warns inflation will erode government public service spending
- Projected borrowing costs for 2029-30 to rise by about £10bn
- Government urged to avoid unrealistic future spending cuts in Budget
The price spikes triggered by the war involving Iran and Russia's invasion of Ukraine pose a major challenge to Chancellor John Healey as he prepares his first official Budget, an influential economic think tank has warned. The Institute for Fiscal Studies (IFS) stated that higher-than-expected inflation will eat into the funds allocated for public services.
This squeeze forces the chancellor to weigh difficult choices between spending cuts, tax increases, or a combination of both to make the October 28 Budget figures add up, all while managing rising costs of government debt interest payments driven by volatile bond markets.
This fiscal dilemma highlights the vulnerability of the UK economy to external shocks, particularly energy supply disruptions originating from the Middle East. Balancing market confidence with adequate public spending remains a critical test for the Treasury amid heightened global economic uncertainty.
The IFS noted that while elevated inflation will boost tax revenues, it simultaneously erodes the real value of government departmental cash budgets. Analysts estimate that recent bond market turbulence and persistent inflation will add roughly £10bn to forecasts for government borrowing costs by the 2029-30 financial year.
Speaking ahead of the annual International Monetary Fund meeting, Chancellor Healey addressed the broader economic climate by noting that the consequences of conflicts in the Middle East and Europe are impacting nations worldwide through higher fuel prices and mortgage rates, though Britain and its allies are prepared to face these challenges together. The Treasury declined to comment on ongoing rumors and speculation.
Stock photo for illustration only, not from the actual event
Furthermore, the IFS cautioned Healey against incorporating spending announcements into the upcoming October 28 speech that the administration has no intention of honoring. The think tank argued that ignoring inflation's impact on departmental plans or inserting implicit spending cuts that will never materialize would render the Budget a work of fiction.
"The consequences of conflict in the Middle East and Europe are hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home."
John Healey
Despite these pressures, the IFS still expects the government to meet its self-imposed fiscal rules regarding borrowing for investment and reducing debt as a percentage of GDP by 2029-30. However, this buffer—known as headroom—is projected to shrink to roughly £20bn, down from the £24bn predicted earlier by the Office for Budget Responsibility (OBR).
Source: BBC Business
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