The Institute for Fiscal Studies (IFS) has cautioned that the recent surge in energy prices, driven by the US-Israel war in Iran and Russia's ongoing invasion of Ukraine, could undermine Chancellor John Healey's fiscal plans ahead of his 28 October Budget.
According to the IFS, higher-than-expected inflation could reduce the resources available for public services, forcing Healey to choose between spending cuts, tax rises, or a combination of both. The think tank urged the government to ensure its spending plans are credible, rather than proposing unrealistic future cuts to make the numbers add up.
IFS director Helen Miller said a "steady-as-she-goes" Budget was not an option. "Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments' spending plans off course," she said. "Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction."
The Treasury declined to comment on "rumour and speculation," but speaking ahead of the annual International Monetary Fund meeting, Healey said the consequences of conflict in the Middle East and Europe were "hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home."
He added that Britain and its allies could "face up to these challenges together," and that his Budget would "build on this approach with fiscal discipline helping to deliver economic resilience" and give people "breathing space."
The government faces growing pressure to demonstrate to financial markets that it has a tight grip on finances as borrowing costs rise. The wars have contributed to higher energy prices globally, passed on to consumers, and have also increased the cost of UK government debt interest payments.