Chancellor John Healey's upcoming budget faces pressure from rising inflation linked to the ongoing conflict in the Middle East, according to the Institute for Fiscal Studies (IFS). The IFS warned that this situation could force the government to choose between tax increases, welfare cuts, or a mix of both. Healey's budget is set to be presented on October 28.
Key Details
The IFS noted that the war in Iran has led to higher-than-expected inflation. This could raise government borrowing costs by about £10 billion by 2029-30. This inflation may also increase tax revenues as wages rise faster than expected. However, the IFS cautioned that government departments could face cuts in the next Spending Review if inflation keeps rising. An additional £25 billion may be needed for day-to-day and investment spending by 2030-31.
Background
In response to these challenges, 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." He stressed the need for fiscal discipline to ensure economic strength. However, IFS director Helen Miller advised against a "steady-as-she-goes" approach. She warned that unrealistic spending plans could hurt the budget's credibility.
The potential for tax increases or spending cuts could affect public sector bonds and consumer confidence. This is especially true in London, where the impact may be felt most strongly. Investors will closely watch the government's specific fiscal strategies in the upcoming budget announcement to assess their potential effects on the economy and markets.
Based on reporting by: standard.co.uk, bbc.co.uk