Understand
Iran war threatens Chancellor John Healey's Budget plans, IFS warns
Overview
The Institute for Fiscal Studies (IFS) has warned that price spikes caused by the conflict in Iran pose a major challenge for Chancellor John Healey ahead of his first Budget. Higher inflation could erode public spending, forcing the government to choose between spending cuts, tax rises, or both, while maintaining a reduced financial headroom.
Key points
- The US-Israel war in Iran and the invasion of Ukraine have driven up global energy prices and UK borrowing costs.
- The IFS warned that a 'steady-as-she-goes' Budget is not viable and cautioned against unrealistic spending cuts.
- Higher inflation is expected to add around £10bn to forecasts for government borrowing costs by 2029-30.
- The government is projected to meet its fiscal rules with a reduced headroom of around £20bn.
- Maintaining department budgets against higher inflation could require an extra £25bn by 2029-30, pointing towards potential significant tax rises.