- Published
The price spike caused by the US-Israel war in Iran poses a major challenge for Chancellor John Healey as he puts together his first Budget, an influential think tank has warned.
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tank → publish → Budget
Higher-than-expected inflation could eat into what the government hoped to spend on public services, meaning Healey will have to choose between spending cuts, tax rises, or a mixture of both, the Institute for Fiscal Studies (IFS) said.
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Institute → expect → Studies
It urged the government to ensure its spending plans are credible, as opposed to proposing unrealistic future cuts to make the Budget add up.
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Budget → urge → cuts
The Treasury declined to comment on "rumour and speculation".
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Treasury → decline → rumour
However, speaking ahead of the annual International Monetary Fund meeting this week, Healey said: "The consequences of conflict in the Middle East and Europe are hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home.
"
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consequences → speak → home
But Britain and our allies can face up to these challenges together."
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Britain → face → challenges
He said his Budget "will build on this approach with fiscal discipline helping to deliver economic resilience" and give people "breathing space".
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discipline → say → space
However, the government is under growing pressure to show financial markets that it has a tight grip on finances as the cost of borrowing rises.
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cost → grow → borrowing
The IFS cautioned Healey about making any spending announcements in the 28 October Budget speech he has no intention of honouring.
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he → caution → intention
"A 'steady-as-she-goes' Budget is not an option available to the chancellor," said IFS director Helen Miller said.
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Miller → go → chancellor
"Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments' spending plans off course.
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inflation → choose → course
"Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction," she added.
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she → pencil → fiction
The US-Israel war against Iran and Russia's invasion of Ukraine have together helped drive up energy prices around the world.
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war → help → world
These higher costs have been passed to customers via higher prices on shelves and at the pumps.
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costs → pass → pumps
The wars have also contributed to a rise in the cost of UK government debt interest payments, adding to the pressure on Healey.
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wars → contribute → Healey
Although higher inflation will boost tax revenues, it will also eat into the value of departments' cash budgets, the IFS said.
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IFS → boost → budgets
Like other analysts, the IFS thinks recent turbulence on bond markets and higher inflation will add around £10bn to forecasts for the government's borrowing costs in 2029-30.
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turbulence → think → 2029
However, it still expects the government to meet its self-imposed fiscal rules - that it will only borrow for investment projects by the financial year 2029-30 and also be reducing debt as a percentage of GDP - not least as inflation pushes up tax revenues.
But it expects those rules to be met by a smaller buffer - known as "headroom" - of around £20bn.
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rules → expect → 20bn
That is less than the £24bn buffer predicted at the time of the Spring Statement by the official forecaster, the Office for Budget Responsibility (OBR).
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That → predict → Responsibility
Recent indications have been that the markets would be comfortable with that degree of reduced headroom.
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markets → reduce → headroom
The IFS also expects any "breathing space" help for households to be temporary and limited in scale.
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help → expect → scale
However, the IFS warns that in such a volatile environment, its forecasts are exceptionally uncertain.
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forecasts → warn → environment
And the official forecast from the OBR - which the chancellor relies on when making his plans - may come to a very different conclusion.
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chancellor → rely → conclusion
The IFS reckons that to maintain departments' budgets in the face of higher inflation, the government may need to find an extra £25bn in 2029-30.
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government → reckon → 2029
That is before consider considering the ambition to raise defence spending.
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That → consider → spending
Raising such an amount would point to significant tax rises.
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Raising → raise → rises
The chancellor does not have to address spending totals in this Budget, and may choose to leave such decisions until future events - for example, next year's Spring Statement or Spending Review - by which time the outlook for the economy could look very different.
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outlook → have → economy
But the IFS warned that the spending plans inherited from the previous chancellor, Rachel Reeves, would mean some departments' budgets would not keep pace with inflation in a few years time.
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budgets → warn → time
It said not addressing this would cast doubt on the credibility of the government's plans.
However, previous chancellors have relied on a similar strategy of pencilling in unrealistic future spending plans to ensure that they meet the fiscal rules on the day - only to change the plans further down the line.
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they → say → line
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