Think tank warns Iran war could strain UK budget plans
The Institute for Fiscal Studies says rising inflation from the Iran conflict may force Chancellor John Healey to reconsider spending, tax or borrowing assumptions in the upcoming Budget.
Higher inflation linked to the war in Iran is expected to pressure Chancellor John Healey as he prepares his first Budget, the Institute for Fiscal Studies (IFS) warned. The think tank said that rising prices could erode the government's ability to fund public services, leaving the chancellor to consider spending cuts, tax increases or a combination of both. It urged the Treasury to present realistic spending plans rather than relying on implicit cuts that may not be implemented.
Healey, speaking ahead of the International Monetary Fund meeting, said the conflict in the Middle East and Europe is driving up fuel prices and mortgage costs in Britain. He added that the Budget will focus on fiscal discipline to provide "breathing space" for households.
The IFS cautioned that the chancellor has no intention of honouring any unannounced spending reductions in the Budget scheduled for 28 October. IFS director Helen Miller said a "steady-as-she-goes" Budget is not feasible and that relying on inherited tax and spending plans would allow inflation to undermine departmental budgets. She warned that merely pencilling in cuts without commitment would make the Budget unrealistic.
The combined impact of the US-Israel war in Iran and Russia's invasion of Ukraine has lifted global energy prices, which in turn has increased costs for UK consumers and raised the government's debt-interest payments. While higher inflation may boost tax receipts, it also reduces the real value of departmental cash allocations.
The IFS estimates that bond-market turbulence and higher inflation could add about £10 billion to the government's borrowing costs for 2029-30. It still expects the Treasury to meet its fiscal rules – borrowing only for investment projects and reducing debt as a share of GDP – but predicts a smaller fiscal "headroom" of roughly £20 billion, down from the £24 billion forecast by the Office for Budget Responsibility (OBR). The institute also notes that any temporary relief for households is likely to be limited in scale.
Given the volatility of the environment, the IFS says its forecasts carry a high degree of uncertainty and that the OBR's official projections could differ substantially. To preserve departmental budgets amid higher inflation, the institute calculates that the government may need an additional £25 billion in 2029-30, before accounting for any increase in defence spending, which could imply further tax adjustments. Healey may defer final spending decisions to later statements such as next year's Spring Statement or Spending Review.