Arabic version: معهد الدراسات المالية يحذّر من أن التضخم قد يضغط على موازنة هيلي

According to BBC News, the Institute for Fiscal Studies has warned that the price spike linked to the US-Israel war in Iran could pose a major challenge for Chancellor John Healey as he prepares his first Budget on 28 October.

The think tank said higher-than-expected inflation could reduce the spending power of public-service budgets, leaving Healey to consider spending cuts, tax rises or a combination of both. It urged the government to make its plans credible rather than include future cuts it does not intend to deliver. The Treasury declined to comment on “rumour and speculation”.

Speaking before the International Monetary Fund’s annual meeting, Healey said conflict in the Middle East and Europe was affecting countries worldwide, contributing to higher fuel prices and more expensive mortgages in the UK. He said his Budget would build on fiscal discipline to deliver economic resilience and give people “breathing space”.

The IFS said the war against Iran and Russia’s invasion of Ukraine had helped lift global energy prices, which have fed through to prices in shops and at petrol pumps. They have also added to the cost of UK government debt interest payments. Although inflation can increase tax revenues, it also lowers the real value of departments’ cash budgets.

The think tank estimates recent bond-market turbulence and higher inflation could add about £10bn to projected government borrowing costs in 2029-30. It still expects fiscal rules to be met, but with headroom of around £20bn, compared with the £24bn forecast by the Office for Budget Responsibility at the Spring Statement. The IFS said maintaining departmental budgets against inflation may require an additional £25bn in 2029-30, before the ambition to raise defence spending is considered.