The UK faces a difficult choice between raising taxes and accepting deeper real-terms cuts to public services, according to the Institute for Fiscal Studies (IFS), which has warned that the government’s upcoming budget needs more credible spending plans.
In a report published on Monday, the economic think tank said Chancellor of the Exchequer John Healey must address a potential funding gap of up to £35 billion. Without a convincing plan, the budget risks relying on spending assumptions that cannot realistically be delivered, the IFS warned.
The organisation estimated that protecting government departments from real-terms spending cuts would require an additional £25 billion a year by 2030-31. That figure would rise to £35 billion if ministers also carried through plans to increase defence spending to 3 per cent of gross domestic product.
The scale of the challenge leaves the government facing difficult decisions. According to the IFS, raising £35 billion through taxation alone would require a three-percentage-point increase in all income tax rates or in the main rate of value added tax. Either option would conflict with Labour’s manifesto pledges, the report said.
Helen Miller, the IFS director, said the government could not simply continue with its existing tax and spending plans without accounting for the effect of inflation. She warned that leaving departmental budgets unchanged in nominal terms could mean allowing the real value of public spending to fall, reducing the quality or quantity of services.
The report also highlighted the pressure that international developments are placing on the UK’s public finances. Conflicts in the Middle East and Ukraine have contributed to higher global energy prices, increasing costs for households and businesses. The IFS also estimated that bond market turbulence and inflation would add around £10 billion to government borrowing costs by 2029-30.
The warning comes as the government prepares for its October 28 budget. The chancellor must decide how to reconcile spending commitments with the need to maintain confidence in the UK’s public finances, while navigating the political limits on tax increases.
Healey is due to travel to Bangkok, Thailand, for an International Monetary Fund meeting this week. Before the gathering, he said the effects of conflicts in the Middle East and Europe were being felt worldwide through higher fuel prices and more expensive mortgages, adding that Britain and its allies could confront those pressures together.
The IFS’s central message is that the government cannot avoid the underlying trade-off indefinitely. Unless additional funding is identified or spending plans are revised, departments could face real-terms reductions. The budget will therefore need to make clear how ministers intend to balance public services, defence commitments and existing tax promises.