IFS Warns UK Budget Must Address £35bn Spending Gap

Britain faces a £35 billion funding challenge as inflation and higher defense commitments put pressure on public finances, the Institute for Fiscal Studies (IFS) warned ahead of Chancellor John Healey's budget on October 28, 2026. The think tank urged the government to establish credible spending limits and identify how it will cover rising costs rather than postpone difficult decisions until next year's spending review.

In its pre-budget Green Budget report, the IFS said the government must choose between increasing taxes, reducing benefits, finding efficiency savings, or accepting real-terms cuts to public services. The warning comes as the war in the Middle East drives up inflation and borrowing costs, complicating the government's efforts to meet its fiscal rules.

The IFS said maintaining existing departmental budgets without additional funding would reduce the purchasing power of public services. Meanwhile, meeting the government's commitment to raise defense spending to 3% of gross domestic product by 2030 would add to the financial pressure, potentially requiring tax increases or benefit cuts totaling about £35 billion.

Helen Miller, director of the IFS, warned that a budget relying on spending reductions the government had no intention of implementing would undermine its credibility.

"Simply pencilling in implicit cuts that he has no intention of delivering would make the budget a work of fiction." Miller said.

The think tank also cautioned against a budget that simply maintained existing plans while leaving major spending decisions until the next review. It argued that Healey should establish overall spending limits he would be prepared to enforce, even if detailed departmental allocations were decided later.

"If John Healey sets out spending envelopes for public services that he would not be willing to live within, his plan for meeting the fiscal rules will not be credible," the IFS said.

Miller said delaying difficult choices would leave the Treasury dependent on uncertain future developments. She argued that credible planning required the chancellor to prepare for unfavorable economic conditions rather than assume that additional money would become available.

"We would be better served by a chancellor who hopes for the best, but plans for the worst, rather than sets out plans that either say, ‘I hope it’ll be fine and some money will come in’, or ‘I’ll get a plan in a year’s time’." Miller said.

The IFS's warning extends beyond the government's fiscal headroom, the margin available to meet its principal fiscal rule. The former chancellor Rachel Reeves left a £24 billion buffer at the spring statement, but the subsequent rise in government borrowing costs threatens to erode that protection.

According to the IFS, higher debt interest payments could add £10 billion to borrowing in 2029-30. However, inflation could also increase tax receipts, limiting the estimated reduction in fiscal headroom to about £4 billion.

The think tank said this relatively limited change in the fiscal buffer should not distract from the wider impact of inflation on public spending. Higher prices could force departments to deliver fewer services or reduce their quality unless the government provides additional funding.

"Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments’ spending plans off course," Miller said.

The report's recommendations follow concerns about the credibility of government fiscal plans as financial markets respond to rising borrowing costs. Bank of England Governor Andrew Bailey previously stressed the importance of maintaining market confidence in fiscal policy.

"Must be credible and be seen as such by financial markets," Bailey said.

The Treasury said Healey remained focused on supporting businesses, easing the cost of living, and maintaining fiscal discipline. It added that the Office for Budget Responsibility would publish updated economic and fiscal forecasts alongside the October budget.

The government said it would meet its fiscal rules while retaining a buffer against uncertainty, but declined to comment on speculation about the budget's contents before the official forecasts were released.