Chancellor Rachel Reeves will need to come up with billions of pounds more to meet the UK Government's pre-election promises, according to calculations by influential think tank the Institute for Fiscal Studies (IFS) as she finalises details of her first Budget, to be announced on Wednesday, October 30.
It will be the government's opportunity to set out its priorities and values, and to get the focus back on economic priorities after its popularity took a hit following a raft of negative publicity.
Labour has promised no return to "austerity" for public services and a boost to government investment, designed to kick-start desperately needed growth. But to honour those commitments the chancellor will need to "grasp the nettle" and come up with £16billion more on top of £9billion tax rises set out in the Labour manifesto.
The IFS said on their own the £9bn tax rises already planned by the chancellor, might be enough to maintain spending at current levels, including taking inflation into account, although the forecast was so tight it was “on a knife edge”. However, many public services including prisons, higher education and local government are struggling to meet current needs. Pressures are expected to grow, especially in social care and the NHS and the government has pledged additional healthcare staff and other reforms.
Ms Reeves challenge is to set out how she plans to balance Labour’s manifesto promises against a range of self-imposed restrictions against a backdrop of increased debt following the pandemic, higher interest payments and inflation that has only recently returned to normal levels.
A growing and ageing population and the climate transition impose additional challenges and it’s expected that more of the tax burden will fall on higher earners, following the government's surprise decision to limit winter fuel payments to the poorest pensioners. Some are also looking for an end to the two-child limit for benefit payments.
The new government had inherited an "unenviable" situation with the public finances, the IFS said in its regular pre-Budget analysis of the public finances.
Growing pressures on health and pensions, combined with falling revenues from fuel and tobacco duties made the situation harder, but tough decisions were necessary, IFS director Paul Johnson said. "If Ms Reeves does not grasp the nettle on October 30, it could come back to sting her again before the next election," Mr Johnson said.