Iran war threatens Healey's Budget plans, think tank warns

Key Points:

• Chancellor John Healey faces significant challenges in his first Budget due to inflation driven by the US-Israel war in Iran and Russia's invasion of Ukraine, which have caused energy prices and borrowing costs to rise sharply.
• The Institute for Fiscal Studies (IFS) warns that higher inflation could reduce the real value of public service budgets, forcing Healey to consider spending cuts, tax increases, or a combination, while cautioning against unrealistic budget promises.
• Despite inflation boosting tax revenues, the IFS projects an increased government borrowing cost by around £10bn in 2029-30 and a reduced fiscal buffer, though it expects the government to meet its borrowing and debt reduction targets with less headroom.
• Healey emphasized fiscal discipline and economic resilience in his upcoming Budget, acknowledging global challenges but signaling a commitment to providing temporary support for households without compromising financial stability.
• The IFS highlights the uncertainty of forecasts in the current volatile environment and suggests that maintaining department budgets amid inflation and potential defense spending increases could require an additional £25bn by 2029-30, likely necessitating significant tax rises.