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IFS warns Healey’s Budget implies real-terms cuts next year
— 3 mins read
The people who check his sums say the reckoning has been moved to next year, not avoided.
John Healey’s first Budget passed its first test. Ten-year gilt yields edged down two basis points after the speech, and bank investors were relieved that the higher surcharge will last only 15 months. The second test is harder: do the numbers hold up beyond next spring? That one is going less well.
The Institute for Fiscal Studies said today that the Chancellor’s plans point to cuts. “It effectively implies that some public services will see real-terms cuts in next year’s spending review,” said its director, Helen Miller. Departments without ring-fenced budgets would need a £17bn top-up to 2030-31 to avoid those cuts. Lifting defence to 3% of GDP would need another £11bn. Miller thinks the cuts could be delivered. “But I’m sceptical that this government would be willing to do it.”
The City came to much the same view. Paul Dales of Capital Economics summed it up as “better times now, harder times ahead”. Deutsche Bank’s Sanjay Raja said Healey had met his “do no harm” aim but still faces a hole of £25bn to £40bn. ING went further. It said the implied real-terms cuts of 2.6% a year for unprotected departments “almost certainly won’t happen”.
Defence is where this gets uncomfortable for the Chancellor. Healey resigned as Keir Starmer’s defence secretary in June after warning of cash shortfalls in the armed forces. In his own Budget, a £4.7bn gap in the Defence Investment Plan is partly filled by moving capital budgets around Whitehall, and the route to 3% by 2030 has been pushed back to the spending review. Kemi Badenoch said he “should have set out a plan for 3% today”.
Defence is where this gets uncomfortable for the Chancellor. Healey resigned as Keir Starmer’s defence secretary in June after warning of cash shortfalls in the armed forces.
The costs that do take effect now fall on a narrow group. From April 2027, income tax on property and savings income rises by a further two points. Tax on wages and dividends is unchanged. The bank surcharge doubles from 3% to 6% from January to pay for energy support, and income tax thresholds stay frozen. Landlords “aren’t a bottomless pit,” said Elliot Castle of Castle Property Group. The triple lock will also be changed from 2030 if Labour wins the next election.
For households, the Government’s list leads on a £100 energy payment for homes in council tax bands A to D from January, the end of gas standing charges from next year, and a new allowance that means pensioners whose income is no more than the full state pension pay no income tax. The planned £12,000 cap on cash ISAs has been dropped.
The opposition parties attacked it from different directions. Nigel Farage said the Budget was full of “little giveaways” but “doesn’t overall do very much”. Sir Ed Davey said any Budget would be “tinkering around the edges” until the Government fixes Britain’s trading relationship with the EU. Badenoch called the Government “overspent, overborrowed, overtaxed and drowning in an out-of-control welfare system”.
Labour’s own slogan for the package is “Breathing space now, Fresh Hope for the Future”. The first half is accurate. The IFS warns that the space will be filled by “another season of damaging speculation about tax rises”, and the spending review next year is where that speculation will end.
