Healey faces £35bn hole to fund higher defence spending over Iran war, experts warn

JOHN Healey is facing a £35 billion headache to fund higher defence spending and avoid sweeping Whitehall cuts, leading experts warn.

The Chancellor has been dealt a pre-Budget blow of having to hike taxes or cut benefits just to protect public services.

The Middle East conflict has caused an inflation spiral which is eating away at departments’ spending power and pushing up benefits costs.

It comes as Mr Healey last night warned that major economies need a credible plan to get borrowing under control, ahead of his visit to the IMF in Bangkok this week.

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But Helen Miller, director at Institute for Fiscal Studies, says that if he opts to squeeze spending the plans must be credible or the Budget faces being a “work of fiction “.

A “steady-as-she-goes Budget” is not an option available to him, she adds.

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Miller added that sticking with inherited tax and spending plans would allow “inflation to blow departments’ spending plans off course”.

She warned: “It would be a choice to tolerate chunky cuts to the quantity or quality of some public services – cuts that would be larger if defence spending was increased within existing totals.”

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

The Treasury could be forced to find £25 billion extra for day-to-day spending to avoid brutal cuts, the IFS pre-Budget study shows.

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Ambitions for military spending of 3 per cent of GDP by 2030 would cost a further £11 billion by the start of the next decade, they add.

Ministers have committed to spending 3.5 per cent by 2035 and will use the Spending Review next year to set out a path to the 3 per cent target .

Both PM Andy Burnham and Mr Healey have both said they want to reduce the benefits bill – but have yet to set out any definitive timeline.

The warning shot from the IFS comes just over two weeks before Mr Healey delivers his first Budget on October 28.

Mr Healey has previously said that he wants it to offer “breathing space” to both households and to business.

But the body adds that any significant additional day-to-day spending should be met through tax hikes or spending cuts – rather than increased borrowing.

Figures show the debt interest bill has more than DOUBLED since 2019 – now making up £1 in every £13 that Ministers spend.

Mr Healey, speaking ahead of his IMF visit to Bangkok this week, said G7 nations need credible plans to get borrowing costs under control.

He said that “Britain and our allies can face up to these challenges together”

He added: “My Budget will build on this approach with fiscal discipline helping to deliver economic resilience. This means breathing space for today, and hope for the future.”

The Chancellor’s financial buffer could be around £20 billion due to the higher inflation as it boosts tax revenues.

However, the IFS warn that the Budget watchdog could alter this figure by as much as £10 billion depending on issues such as employment , migration and health-related benefits.

Higher inflation has also contributed to higher bond yields which has led to increased government borrowing.

Shadow Chancellor Andrew Griffith said: “Higher borrowing costs and Andy Burnham’s unfunded spending commitments have swallowed up his headroom and created upward inflationary pressure.

“Labour raised taxes by £66 billion in its first two Budgets. Families cannot afford to be lumbered with even more tax rises at this Budget.

“Labour should cut welfare instead of dumping on working people as they have already done.”

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Mr Healey is bound by Labour’s manifesto on tax-raising measures which prevents him from hiking income tax , national insurance and VAT.

A Treasury spokesperson last night said: “The Chancellor is fully focused on his priorities to boost business, help with the cost of living and support people in every postcode, underpinned by fiscal discipline and a commitment to meet the fiscal rules with a buffer against uncertainty.”

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