LONDON: UK Chancellor John Healey faces a fiscal credibility test as he presents the October 28 Budget, with rising energy costs threatening public spending plans and investor confidence.
Higher oil and gas prices, driven by the US-Iran war, have increased the cost of government services. As a result, existing departmental allocations may deliver less than originally planned.
The Institute for Fiscal Studies (IFS) warned on Monday that maintaining public services could require substantial additional funding.
British finance minister John Healey is attending the International Monetary Fund Annual Meetings in Bangkok, Thailand, to push for strict budget discipline and enhanced economic resilience.
“I will work with our international partners to keep trade moving, support families and businesses, and make Britain’s economy stronger and more resilient,” Healey said in a statement from his office.
Its analysis estimated that avoiding cuts to departmental budgets could cost around £25 billion annually by 2030–31.v Meanwhile, protecting services while increasing defence spending could require tax rises or benefit cuts worth approximately £35 billion.
Read: UK Autumn Budget Faces Pressure From Iran War Costs
However, the government faces a difficult choice. Keeping existing spending limits could mean cutting services, while increasing allocations would put further pressure on public finances. Britain’s borrowing figures already show fiscal pressure.
The Office for National Statistics reported public borrowing of £18.3 billion in August, £3.5 billion above official forecasts. Borrowing through August of the financial year reached £77.3 billion, £8.1 billion above projections.
Read: UK inflation hits 41-year high as minister readies budget December 3, 2024
Financial analysts also disagree about how much room remains under the government’s fiscal rules. EY estimated that fiscal headroom had fallen to £11.3 billion from £23.6 billion in March.
In contrast, an illustrative IFS forecast placed the remaining buffer closer to £20 billion. Bank of England Governor Andrew Bailey warned on October 8 that governments must maintain credible fiscal policies to prevent further pressure on borrowing costs.
Read: EU Joint Debt Needed for Spending Pressure, IMF Says
Nevertheless, Healey has pledged to meet the government’s fiscal rules and provide stability for businesses and households. The Office for Budget Responsibility will publish updated economic and fiscal forecasts alongside the Budget on October 28.
