The UK faces a potential fiscal gap of £28 billion by 2030, driven by decisions deferred by Chancellor John Healey regarding defense spending and departmental budgets, according to the Institute for Fiscal Studies (IFS).
In its post-Budget briefing, the IFS stated that Healey's approach relies on optimism rather than concrete plans, citing the need for an estimated £17 billion to address the impact of inflation on departmental budgets by 2030-31. An additional £11 billion would be required to meet the goal of allocating 3% of GDP to defense by the same year.
IFS Director Helen Miller criticized the Chancellor for not outlining a clear medium-term strategy for defense spending. Miller also pointed out that government reserves have been depleted to support spending in the immediate years, a practice she described as contrary to their intended purpose.
"On defence, John Healey confirmed 2030 as a target date to get spending to 3 per cent of GDP, but I'm still no wiser as to how he plans to get there, let alone to 3.5 per cent by 2035," Miller said.
She elaborated that a significant portion of the funding for the defense investment plan, which aims to bring spending to 2.7% of GDP next year and maintain it until 2029-30, came from further cuts to the capital budgets of other government departments. The remainder was drawn from future year reserves.
"This is worth drawing out: John Healey has now spent 25 per cent of the capital reserve set aside for the next three years. He's also spent 40 per cent of the day-to-day reserve," Miller noted. "This is categorically not what the reserves are for. Drawing down reserves is another way the Government has reduced its buffer against future shocks."
Miller also highlighted that departmental spending has been kept broadly unchanged in cash terms, which, in real terms, signifies a cut due to inflation. This suggests that some public services may experience real-terms reductions in the upcoming Spending Review.
"Avoiding the cuts implied by both higher inflation and tight envelopes could plausibly require a top-up of £17billion in 2030-31," she stated. "That's true even before thinking about the £11billion needed to fund defence plans."
The IFS warned of a "clear risk" that the spending review could lead to "another season of damaging speculation about tax rises."
Bee Boileau, a research economist at the IFS, described public service spending as the "Achilles' heel of the consolidation." Current plans, she explained, imply "really very tough times ahead for public services" due to inflation, slow spending growth, and defense commitments.
"The Government could deliver these, but these will imply setting out lots of real terms cuts to departments over the coming years, and there'll be huge pressure to put in some top-ups," Boileau said. "Next year's spending review will be the real crunch point for this Government."