John Healey faces a spending arithmetic problem long before he names a single tax rate, according to the Institute for Fiscal Studies' Green Budget published on Monday. The think tank argues that inflation running hotter than the Treasury assumed in the spring has already eaten into the real value of day-to-day budgets, and that the Chancellor's defence ambitions would widen the gap unless he tops up totals or accepts service cuts.
The IFS frames the choice in blunt terms. Under existing plans, public service spending growth is set to slow sharply in the years ahead. Even before the latest inflation news, the spring Spending Review looked tight: if health spending grew at 2.7% a year in real terms and defence plans stayed unchanged, other departments were already on course for real-terms reductions. Higher inflation forecasts since then make those envelopes stingier without any new policy decision.
Where the pressure lands
Health and defence are the two areas Labour has promised to protect, which leaves everything from courts to local government carrying the residual risk. The IFS estimates that avoiding cuts elsewhere while meeting those protected paths could require a combined top-up to day-to-day and investment spending of around £25 billion in 2030–31. That is not a forecast of what Healey will do; it is the bill for keeping his existing promises internally consistent.
The alternative, the report stresses, is to let totals stand and watch the quality or quantity of services fall. If Healey instead chooses to raise spending to avoid cuts and fund higher defence spending, the IFS puts the combined tax or benefit adjustment at roughly £35 billion. The Chancellor's fiscal rules will be judged against whichever spending envelope he writes down next month, and the IFS warns that plans only work if those envelopes are ones he would actually live within.
Macro headwinds
Separate chapters in the Green Budget highlight why the margin for error is thin. Inflation is rising again, which weighs on demand and tightens financial conditions. Gilt yields have moved up, raising the cost of servicing debt that is already at historic highs. Some of the inflation pass-through may lift tax receipts if wages follow prices, but benefits and index-linked spending also climb, and the net effect depends on the Office for Budget Responsibility's forthcoming forecast.
For businesses, the immediate read is less about a single levy and more about whether Whitehall departments can honour procurement and grant programmes already in train. Civil service hiring freezes, delayed capital projects and underspent arm's-length bodies have all been used in past tightening cycles. The IFS note is effectively asking Healey to say which of those levers he is willing to pull, and which services he is not.
What happens next
Healey is expected to set multi-year spending totals at the Budget rather than reopen every programme line. Treasury officials will be trading off near-term growth support against the credibility of medium-term consolidation. The Green Budget does not prescribe a single answer; it maps the trade-offs if the Chancellor wants to keep services steady without another large tax event. Markets will watch whether the published numbers match the political rhetoric on NHS funding and the 3% of GDP defence goal Healey backed while at the Ministry of Defence.
Monday's release lands as the Prime Minister prepares a separate speech on Britain's relationship with the EU, a reminder that growth policy and fiscal policy are being debated on parallel tracks. For now, the IFS has put a £25 billion question on Healey's desk: fund it, cut elsewhere, or admit that current plans imply retrenchment outside the protected departments.