Chancellor Healey retreats on welfare cuts as IFS warns of £28bn gap

Chancellor John Healey backed away on Thursday from cutting the welfare bill this parliament, after the Institute for Fiscal Studies said his budget leaves a £28bn-a-year hole in future spending plans.

The IFS verdict was blunt. It said Healey would need to set aside an extra £28bn a year to offset inflation on future spending and to hit the target of spending 3% of GDP on defence by 2030. He did neither.

Helen Miller, the IFS director, said Healey had opened the way to "a spending review that looks pretty brutal for some departments" — including real-term budget cuts. "Public service spending plans look extremely tight. They don't look to me like plans that this government would want to deliver," she said. That, she added, means Healey could face "another season of damaging speculation about tax rises".

What did Healey say about welfare?

The welfare bill sits outside the spending review, which covers departmental budgets. But Healey used his broadcast round to stress his intent. "We have to bring the benefits bill down," he told BBC Radio 4's Today programme.

He appeared to go further when asked whether the bill would fall before the next election. "There will be. There will be a reduction in the benefits bill," Healey said. "We'll do that in a Labour way and we will do that because it is simply not good for Britain or progress to have a bigger and bigger benefits bill."

Treasury officials then clarified he had not meant to give a timeline. Healey later told Channel 4: "It's not correct to say that we are going to bring this welfare bill down in this parliament because we've not set a timetable for that."

Instead, he pointed to two forthcoming reviews: Alan Milburn on employment support for young people, and Stephen Milburn's counterpart Stephen Timms on disability benefits. Milburn is expected to recommend additional spending upfront, aimed at cutting costs over the longer term by moving more young people into work.

The numbers explain the pressure. The Office for Budget Responsibility forecasts total welfare spending will grow from £334bn last year to £431bn by 2030. About half goes to pensioners. A quarter goes to sickness and disability benefits. The overall forecast has risen by £8bn since March.

How tight are the public finances?

Healey's buffer against Labour's fiscal rules now stands at £15bn. The IFS warned that figure could easily be eroded by higher-than-expected energy costs. The chancellor used part of the buffer to absorb the impact of the Iran war, which has pushed up the government's cost of borrowing. At the spring statement, Rachel Reeves had built up headroom of £24bn.

Miller called that a "reasonable" decision, but cautioned: "a lower buffer leaves the chancellor more exposed to future bad news".

How did critics judge the cost-of-living package?

The budget's centrepiece was a £100 winter cost-of-living payment for most households. Critics called the approach scattergun.

The Resolution Foundation said Healey failed to target energy support at the households that need it most, ahead of a difficult winter with bills expected to rise sharply in January and the Bank of England set to raise interest rates next week.

Ruth Curtice, the thinktank's chief executive, said: "Faced with a tough backdrop amid global economic turmoil, the chancellor delivered a scattergun budget that did little to address the sharp challenges facing Britain. Cost of living support is being spread far too thinly and will leave even those families receiving help facing higher energy bills than they did during the last energy price shock."

Paul Nowak, the TUC general secretary, has pushed hard for a bank windfall tax to fund energy support. Healey doubled the surcharge banks pay on profits from 3% to 6%, for 15 months. Nowak welcomed the move but wanted more: "It was right to tax banks to help people with their energy bills, but I think banks could have been asked to pay a fairer share. He's going to review it in 15 months. We're going to be looking as part of that review – if banks are still making windfall profits – for him to extend and increase the bank tax."

What about Brexit and growth?

Healey offered a gloomy global outlook. He said the single biggest driver of better UK prospects would be an end to the Iran and Ukraine wars.

On Europe, he took a more cautious line than the prime minister. Asked by LBC whether growth would be stronger inside the EU or single market, Healey replied: "Well, I don't actually accept that. Brexit has certainly hit our level of growth. It's certainly hit our level of trade. But we had a referendum. We're out of the European Union. The challenge for me now is how do we make the best of an economy which this year has proved remarkably resilient."

Asked by Channel 4 whether he shared Andy Burnham's hope of rejoining the bloc in his lifetime, Healey said: "I'm older than Andy Burnham. I don't expect to see that."

The chancellor has bought himself a quiet week. The IFS numbers suggest he has deferred, not avoided, the hard choices — and the £15bn buffer leaves little room for the next shock.

By Daniel Okafor