35bn

Chancellor John Healey is facing a funding gap of up to £35bn and must set out “credible” spending plans in his first Budget on 28 October, an influential think tank has warned.

The Institute for Fiscal Studies (IFS) said that if the government wants to increase defence spending to 3% of national income by 2030 and lift health spending without squeezing other departments, it will need a “top-up” of billions of pounds.

Higher inflation, caused by the Iran war, 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 IFS warned.

The Treasury declined to comment on “rumour and speculation”.

The IFS urged the government to ensure its spending plans are credible, as opposed to proposing unrealistic future cuts to make the Budget add up.

The government is under growing pressure to show financial markets that it has a tight grip on finances as the cost of borrowing rises.

The IFS cautioned Healey about making any spending announcements in the 28 October Budget speech he has no intention of honouring.

“A ‘steady-as-she-goes’ Budget is not an option available to the chancellor,” said IFS director Helen Miller.

“Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments’ spending plans off course.

“Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction,” she added.

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.

“But Britain and our allies can face up to these challenges together.”

He said his Budget “will build on this approach with fiscal discipline helping to deliver economic resilience” and give people “breathing space”.

Miller told the BBC’s Today programme that Healey has inherited spending plans for government departments where spending growth would slow in the coming years.

“[It] already looked likely that he would have to make spending cuts just to live within those,” she said. “Now, along comes the Middle East war, inflation goes up and those spending plans look very tight indeed.”

Added to that, the chancellor has said he wants to get defence spending up to 3% of national income. Under Keir Starmer’s leadership, Healey resigned as defence secretary in June in a battle with the Treasury over military spending.

Miller said: “You put all that together, if he wanted to do all of that within current spending plans he’s looking at having to cut some other services by something like £35bn.”

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.

But the IFS warned not addressing it would cast doubt on the credibility of the government’s plans.

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.

Miller said Healey’s focus on fiscal discipline was a “good first start but what he needs to do is not just say he’s going to cut borrowing in coming years but actually deliver on those plans.”