The Institute for Fiscal Studies has put the figure at up to £35 billion in additional tax revenue that Chancellor John Healey may need to raise, driven by defence spending commitments and inflationary pressures stemming from the Iran conflict. According to the IFS, the Chancellor faces a choice between accepting real-terms reductions in funding for certain public services or injecting additional tens of billions of pounds into departmental budgets.
Maintaining departmental spending without additional borrowing would, by the decade's end, require either tax increases on the scale of three percentage points added to income tax or VAT, or reductions to welfare payments. Plans for the 28 October Budget point toward honouring Labour's manifesto commitment on income tax, national insurance, and VAT while steering clear of welfare reductions, with attention turning instead to a range of revenue measures — among them a levy on bank profits, a possible windfall tax on energy producers, and potential adjustments to capital gains tax rates.
Polling conducted by BMG Research in the preceding month, on behalf of a broadcaster, put voter backing above the halfway mark for both a windfall levy on banks and an extension of the mansion tax to properties priced at £1.5m or higher. Helen Miller, director of the IFS, conveyed to a broadcast outlet that balancing spending demands against the manifesto's tax commitments would prove far from straightforward, adding that even substantial adjustments to capital gains tax were unlikely to produce revenue anywhere near the tens of billions the situation demands.
Healey is expected to focus the Budget on the question of how much "fiscal headroom" remains — the buffer the Government holds between its borrowing levels and the ceilings it has set for itself — while larger decisions on areas including defence are left to the spending review due the following year. On Budget day, the Office for Budget Responsibility will publish its assessment of the available fiscal headroom.
Some analysts have, over the past few weeks, floated the possibility that rising government borrowing costs linked to the US-Iran conflict could have reduced the £24bn fiscal buffer Rachel Reeves set out at last year's Budget, leaving headroom of around £12bn. A pre-Budget assessment by the IFS put the headroom figure at a notably higher level than the one Reeves left behind, though still falling short of that inherited amount.
According to the think-tank's analysis, elevated borrowing costs tied to the Iran conflict would put upward pressure on government debt, narrowing whatever fiscal space remained. The IFS noted that while a rise in inflation would weigh on the broader economy, it would also lift tax receipts, cushioning some of the overall effect.
According to IFS modelling, a "plausible scenario" would leave fiscal headroom at around £20bn, though the body cautioned that substantial uncertainty in the OBR's earnings projections put the genuine range anywhere between £10bn and £25bn. En route to Bangkok for an international summit, Healey outlined how armed conflicts in the Middle East and Ukraine were placing upward pressure on fuel costs and mortgage rates, pledged adherence to fiscal discipline, and indicated that measures to ease household cost-of-living pressures were under consideration, with support for energy bills broadly anticipated.
The IFS observed that although the headroom figure appeared more favourable than those produced by a number of recent forecasts, the substantially greater challenge for Healey rests in the accumulating volume of expenditure demands that lie ahead. The think-tank noted that Reeves's expenditure projections from 2028-29 onward had already been characterised as presenting a demanding fiscal picture.
Maintaining defence expenditure at 2.7 per cent of GDP while extending health spending growth beyond 2028-29 along its recent trajectory would, under that set of assumptions, leave other departmental budgets facing reductions in real terms. The IFS noted that inflation linked to the conflict in the Middle East looks set to place additional strain on already stretched budgets.
The IFS estimated that Healey may need to inject around £25bn of additional funding into departmental budgets by 2030-31 to prevent reductions in spending. On top of that, raising defence spending to 3 per cent of GDP by 2030 — the target Healey stepped down as defence secretary to press for — would add roughly £11bn to the bill by 2030-31, bringing the total shortfall facing the Chancellor to around £35bn.
Speaking on Sunday, Andy Burnham put forward the view that defence spending would need to take up a greater share of the public budget. Speaking on a podcast, the Prime Minister drew a distinction between welfare budgets and spending increases, contending that treating one as a ready source of funds for the other would place the country in a vulnerable position — a concern tied in part to the number of young people already outside education, employment, or training and with limited paths forward.
Outlining a welfare overhaul, the Prime Minister committed to applying the same degree of resolve to the triple lock as had been brought to bear on previous policy decisions, with plans to dismantle the pension guarantee in its existing form after the next general election, using the resulting savings to finance universal free social care.
Speaking to a news outlet, Miller explained that any decision by Healey to address the spending gap through taxation would not require all revenue-raising measures to be unveiled at once in the Budget, adding that fiscal pressure accumulates gradually and that a target such as £35bn could be pursued across multiple fiscal events rather than in a single announcement. She noted that a graduated increase in contributions over time could, in theory, accumulate the necessary funds before the 2030–31 deadline, though the manifesto pledges ruling out rises to income tax, national insurance, or VAT left the revenue options narrow — with £35bn representing the equivalent of roughly three percentage points added across all income tax bands, or the same increment applied to the standard VAT rate.
Pointing to the boundaries set by the Labour Party's own fiscal commitments, Miller observed that even the broadest available tax instruments fall short of closing the gap — a root-and-branch reform of capital gains tax, for instance, would in her estimation produce revenue only in the high single-digit billions. Addressing the matter would, in her view, call for a wide range of incremental steps, each modest in scope but numerous in number.
Miller noted that Healey would not necessarily need to find the full £35bn through tax rises alone, though the task would be far from straightforward. Among the options available, ministers have identified reducing welfare payments, scaling back plans across areas such as health and defence, or accepting a decline in the standard of public services.
One side of the debate held that spending limits set by the Chancellor ought to reflect what he would realistically honour, with any genuine drive to reduce public outlays requiring an open acknowledgement that certain services would face constrained funding, while projecting reductions he had no concrete plan to deliver would reduce the Budget to little more than a work of fictional accounting — a view the Conservatives disputed by pressing Healey to rule out any increase in taxation. Shadow Chancellor Andrew Griffith called on Labour to reduce welfare spending rather than imposing additional burdens on employed taxpayers, while a Treasury spokesperson set out the Chancellor's stated priorities as backing business activity, easing household cost pressures, and extending support across all parts of the country, within a framework of fiscal discipline and adherence to the fiscal rules with a buffer built in against uncertainty.
A revised forecast from the OBR is scheduled for release alongside the October Budget, with any commentary on rumours, speculation, or advance proposals about its contents withheld until that point.
