IFS warns Healey budget sets up 'brutal' spending review next year
The Institute for Fiscal Studies says the chancellor's first budget left a £28bn shortfall and implies real-terms cuts for some public services.
At a glance
- The IFS says John Healey's first budget failed to cover a £28bn shortfall needed to avoid a return to austerity.
- The thinktank warns next year's spending review implies real-terms cuts for some public services.
- Healey kept £15bn of headroom, down from the £23.6bn buffer left by predecessor Rachel Reeves.
The Institute for Fiscal Studies (IFS) has warned that UK chancellor John Healey's first budget has paved the way for a "brutal" spending review next year, after it failed to cover a £28bn shortfall in the public finances needed to avoid a return to austerity.
In its assessment, published a day after Healey's statement to the Commons, the thinktank said the chancellor had left himself a "mountain to climb" by ducking several big decisions. Plans for overall departmental spending across the rest of the parliament were left broadly unchanged in cash terms, the IFS said, but with the war in the Middle East fuelling a surge in inflation and raising the cost of delivering public services, that amounts in effect to large cuts in the run-up to the next general election.
Helen Miller, director of the IFS, said avoiding a return to austerity for unprotected departments could require an extra £17bn for spending plans in 2030-31. That is before counting a further £11bn needed to fund a commitment to raise defence spending to 3% of GDP.
"It effectively implies that some public services will see real-terms cuts in next year's spending review," she said.
With Labour having promised there would be no return to austerity as Andy Burnham's government prepares for the next election, Miller said it appeared extremely unlikely that Healey would follow through with such cuts. She added: "A clear short-term risk with the chancellor's choices is that next year – with low headroom and a spending review that looks pretty brutal for some departments – we see another season of damaging speculation about tax rises."
Tax rises on banks and landlords
In the budget, Healey raised taxes on banks and landlords to fund relief for households squeezed by the energy shock emanating from the Middle East war. Against a highly uncertain global backdrop, he stuck to the government's fiscal rules with £15bn of headroom – a reduction from the £23.6bn buffer left by his predecessor, Rachel Reeves – as the conflict drove up the UK government's borrowing costs.
The IFS said allowing a modest reduction in headroom was a "reasonable choice" given grim forecasts for household living standards and growth in the British economy. But it criticised Healey's plans for meeting the fiscal rules, because they effectively rely on him cutting public spending or announcing tax increases he has yet to prepare the public for.
Miller said: "My concern is not that it would be impossible to deliver the implied cuts to other services – that could be done. But I'm sceptical that this government would be willing to do it."
Source: The Guardian Business.
Questions and answers
- What did the IFS say about John Healey's budget?
- The IFS said the budget left a £28bn shortfall and paved the way for a "brutal" spending review, implying real-terms cuts for some public services. It called the plan to allow a modest fall in headroom a "reasonable choice".
- What taxes did John Healey raise in his first budget?
- He raised taxes on banks and landlords to fund relief for households squeezed by the energy shock caused by the war in the Middle East. He also kept the government's fiscal rules with £15bn of headroom.
- How much extra spending does the IFS say is needed?
- The IFS says avoiding austerity for unprotected departments could require a £17bn top-up to 2030-31 spending plans, plus £11bn more to raise defence spending to 3% of GDP.
