Iran war threatens John Healey’s Budget plans, IFS warns

The US-Israel war against Iran poses a major risk to Chancellor John Healey’s first Budget by driving up prices, the Institute for Fiscal Studies (IFS) warned.

Higher inflation could reduce the real value of planned spending on public services. The IFS estimates that protecting departmental budgets in 2029-30 could require an extra £25bn.

Healey is due to deliver the Budget on 28 October. The IFS urged him not to include future spending cuts that the government does not intend to deliver.

Higher borrowing costs

The war against Iran and Russia’s invasion of Ukraine have helped push up energy prices, raising costs for consumers, including at the pump. The conflicts have also increased the UK’s debt-interest bill.

Like other analysts, the IFS expects bond-market turbulence and higher inflation to add about £10bn to forecasts for borrowing costs in 2029-30.

A smaller fiscal buffer

The institute still expects the government to meet its fiscal rules: borrowing only for investment and reducing debt as a share of GDP by 2029-30. But its headroom could be about £20bn, below the £24bn forecast by the OBR at the time of the Spring Statement.

IFS director Helen Miller said sticking with inherited tax and spending plans would allow inflation to erode departments’ real budgets. She warned that relying on implausible future cuts would undermine the credibility of the Budget.

The Treasury declined to comment on “rumour and speculation”. Healey said conflicts were raising fuel and mortgage costs, but that the Budget would combine fiscal discipline with economic resilience and temporary support for households.

The chancellor may leave overall spending decisions until the Spring Statement or a Spending Review. The IFS said its forecasts were exceptionally uncertain, and the official OBR forecast could reach a substantially different conclusion.