You can't spend money you don't have, yet modern chancellors keep trying anyway. As the Institute for Fiscal Studies drops its latest warning ahead of the 28 October budget, it’s clear that British public finances are facing another severe credibility test. Chancellor John Healey is currently staring down roughly £35bn in unacknowledged spending pressures fueled by inflation shocks and defense commitments. If these figures get ignored or swept under the rug until next year's spending review, the upcoming fiscal plan runs the risk of becoming an expensive work of fiction.
Let's look at what's actually driving this friction. Bond markets are jittery. The war in the Middle East has sent shockwaves through global energy and financial markets, driving up government borrowing costs. At the same time, inflation refuses to cooperate. While higher inflation temporarily juices tax revenues, it simultaneously erodes the purchasing power of public services. Departments are expected to deliver the same or better outcomes while their actual budgets buy less and less.
The £35 Billion Blind Spot
Everyone loves a clean spreadsheet. Politicians adore painting a picture of fiscal stability, hiding structural cracks behind optimistic assumptions. The IFS points out a glaring mismatch: compensating for inflation while funding the pledge to push defense spending to 3% of GDP by 2030 requires about £35bn in tough choices. That means either raising taxes, cutting benefits, or accepting a severe degradation in public service quality.
If Healey chooses to stick blindly to inherited spending plans without topping up departmental budgets, he’s basically greenlighting stealth cuts to schools, hospitals, and local councils. It's a classic shell game. Pretend the money is there, kick the hard decisions down the road, and hope economic growth saves the day. Markets see right through this routine. Bank of England Governor Andrew Bailey has already made it crystal clear that fiscal policy must be credible to retain investor confidence. When chancellors rely on wishful thinking, bond yields react brutally.
Why Kicking the Can Fails Every Time
Procrastination is an art form in Westminster. Downing decisions to a future spending review feels politically safe today, but it destroys long-term financial stability. Helen Miller, director of the IFS, put it bluntly: a chancellor who hopes for the best instead of planning for the worst is setting up the economy for a harder fall.
Consider how this plays out in real terms. When you underfund public services year after year, infrastructure rots, waiting lists grow, and recruitment crises deepen. You don't save money by delaying structural fixes; you just pay triple later to clean up the mess. Pretending that departments can magically absorb inflation shocks without service failures is insulting to anyone running a hospital trust or a police force.
What Needs to Happen Next
If you want a budget that survives contact with reality, transparency has to replace optimism.
- Acknowledge Total Envelope Costs: Set spending limits that reflect true operational costs, including inflation adjustments and defense milestones.
- Stop Relying on Next-Year Defenses: Deal with immediate structural funding gaps now instead of hiding behind future spending reviews.
- Match Rules to Reality: Ensure fiscal rules have realistic buffers that withstand geopolitical shocks without requiring emergency mid-year crutches.
Honesty won't win immediate popularity contests, but it prevents economic chaos. It’s time for the Treasury to stop writing fantasy novels and start balancing the books with actual numbers.
