IFS warns Healey of £35bn UK Budget gap

The Institute for Fiscal Studies has warned that Chancellor John Healey is facing a funding shortfall of around £35 billion if he is to deliver existing spending plans while maintaining public services. The estimate reflects the impact of higher inflation and policy pledges that increase pressures on the public finances. The IFS says filling a gap of this size could require substantial tax rises or cuts to benefits if other spending is to be protected.

The funding challenge is closely tied to commitments such as raising defence spending and lifting health budgets without squeezing other departments. The IFS calculates that compensating for the inflation shock and funding the pledge to raise defence spending to 3% of GDP by 2030 would require tax rises or benefit cuts of about £35 billion. National press coverage has focused on the scale of tax changes that might be needed to close such a gap.

Higher inflation has eroded the real value of departmental budgets set in cash terms but has also increased tax revenues, as higher prices and wages lift nominal tax bases. This dual effect complicates the fiscal outlook by raising both demands on, and resources for, the public sector. The IFS notes that while inflation will boost tax receipts, it will not fully offset the pressures created by higher spending needs and borrowing costs.

A key driver of the deteriorating outlook is the cost of servicing government debt. The IFS estimates that higher interest rates could add around £10 billion to forecasts for government borrowing in 2029–30. Live business coverage underscores that this increase in borrowing costs sits alongside other spending pressures, reinforcing the overall £35 billion challenge identified by the think tank.

John Healey is due to deliver his first Budget on 28 October 2026, a focal point for decisions on how to respond to the emerging gap. The IFS is urging the chancellor to set out clear and credible spending envelopes rather than postponing difficult choices until a later Spending Review. It argues that simply pencilling in cuts that are unlikely to be delivered would undermine the credibility of the fiscal plans.

Helen Miller, an IFS director, warned that relying on implicit, undeliverable reductions would risk turning the Budget into a "work of fiction". The think tank’s report stresses the importance of transparent trade-offs between spending, taxes and borrowing. Media roundups also highlight IFS calculations that closing a gap on this scale solely through broad-based taxes would be equivalent to about three percentage points on major tax rates, underlining the political and economic sensitivity of the decisions facing the Treasury.