John Healey’s budget leaves £28bn gap before ‘brutal’ spending review

By Nathan Brooks

John Healey’s first budget leaves a £28bn gap in the public financing needed to avoid a return to austerity, the Institute for Fiscal Studies said.

A day after Healey’s address to the Commons, the IFS said the chancellor had ducked several major decisions in his debut tax and spending statement. The think tank said he had left himself “a mountain to climb.”

Helen Miller, the IFS director, said unprotected government departments could require a £17bn top-up to spending plans for 2030-31 to avoid renewed austerity. That figure excludes an additional £11bn needed to fund the government’s commitment to increase defence spending to 3% of GDP. The two amounts add to the £28bn gap identified by the IFS.

“It effectively implies that some public services will see real-terms cuts in next year’s spending review,” Miller said.

What does this change for public services and households?

The IFS said Healey left plans for overall departmental spending across the rest of the parliament broadly unchanged in cash terms. The think tank also linked the war in the Middle East to an inflation surge, raising the cost of delivering public services. In cash terms, the overall envelope stays broadly unchanged; in purchasing-power terms, it shrinks.

The IFS said those choices effectively pencil in large cuts before the next general election. Miller said avoiding renewed austerity for unprotected departments depends on the £17bn top-up. Yet she said it appeared “extremely unlikely” that Healey would follow through with such cuts, because Labour promised no return to austerity and Andy Burnham’s government is preparing for the next election.

“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,” Miller said.

Her comment separates administrative feasibility from political willingness. The IFS said cuts could happen; Miller questioned whether Labour would accept them. That leaves households and service users facing an unresolved choice between additional spending, real-terms reductions or higher taxes.

The IFS criticized Healey for deferring some important decisions to next year’s spending review. In the think tank’s view, his fiscal plans rely on future public-spending cuts or tax increases that he had yet to prepare the public for.

Miller put the near-term risk plainly: “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,” she said.

On Wednesday, in his first budget as chancellor, Healey raised taxes on banks and landlords to fund relief for households squeezed by the energy shock emanating from the Middle East war. The IFS said Healey made that move against a highly uncertain global backdrop.

He also kept to the government’s fiscal rules with £15bn of headroom. That allowed a hit to the £23.6bn buffer left by his predecessor, Rachel Reeves, as the conflict drove up UK government borrowing costs. Healey’s low-key Commons speech had been designed with febrile bond markets in mind.

The IFS called the modest reduction in headroom a reasonable choice. It did so against forecasts of grim household living standards and weak growth in the British economy. The think tank’s criticism was not the buffer reduction itself, but Healey’s decision to postpone major choices that his fiscal rules required.

For banks and landlords, Wednesday’s budget means higher taxes; households receive relief from the energy shock. For businesses overall, the IFS warning leaves the future tax mix open while the government’s fiscal headroom remains limited. The larger question is whether next year’s spending review produces broader tax rises to protect public services.

Under the IFS’s analysis, next year’s spending review must resolve one choice: add money for services, deliver real-terms cuts or prepare tax rises. The defence commitment adds £11bn to the pressure. Without a larger top-up, households and service users face constrained services and another season of damaging speculation about tax rises.