The US-Israel war in Iran is causing significant economic challenges for UK Chancellor John Healey as he prepares his first Budget. The Institute for Fiscal Studies warns that higher inflation could force Healey to choose between spending cuts and tax increases, or both, due to increased borrowing costs and reduced government spending power. Despite these pressures, Healey aims to present a "steady-as-she-goes" approach in the 28 October Budget speech, emphasizing fiscal discipline and economic resilience amidst global challenges.
Written locally by qwen2.5:14b on 2026-10-11,
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- 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.
uncertain
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.
uncertain
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.
uncertain
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.
uncertain
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
The Aporia
