John Healey has backed away from cutting the cost of welfare this parliament, amid dire warnings his first budget could lead to brutal spending cuts because of a £28bn shortfall in public finances.
Experts rounded on Healey’s steady-as-she-goes budget on Thursday, with the Institute for Fiscal Studies saying he had left himself a mountain to climb by ducking big tax and spending decisions.
In a damning analysis, the IFS said Healey would need to have set aside an additional £28bn a year, to offset the impact of inflation on future spending plans and hit the target of spending 3% of GDP in defence by 2030.
Instead Helen Miller, the IFS director, said Healey had opened the way to “a spending review that looks pretty brutal for some departments” – including real-term budget cuts.
“Public service spending plans look extremely tight. They don’t look to me like plans that this government would want to deliver,” she said, adding that meant Healey could face “another season of damaging speculation about tax rises”.
The welfare bill will not be part of the spending review, which focuses on departmental budgets. But in a bid to underline his determination to balance the books, the chancellor pointed to plans for reform, telling BBC Radio 4’s Today programme: “We have to bring the benefits bill down.”
He had earlier appeared to say cuts would be made in this parliament, when asked if there would be a reduction in the bill before the next election. “There will be. There will be a reduction in the benefits bill,” said Healey. “We’ll do that in a Labour way and we will do that because it is simply not good for Britain or progress to have a bigger and bigger benefits bill.”
However, Treasury officials clarified that he had not meant to give a timeline and Healey later told Channel 4: “It’s not correct to say that we are going to bring this welfare bill down in this parliament because we’ve not set a timetable for that.”
Instead, he pointed to forthcoming reviews from Alan Milburn on employment support for young people, and from Stephen Timms on disability benefits.
Milburn is expected to recommend additional spending upfront, aimed at bringing down costs over the longer term by helping more young people into employment.
The Office for Budget Responsibility has said total welfare spending will grow from £334bn last year to £431bn by 2030 – with about half of that being spent on pensioners and a quarter on sickness and disability benefits. The overall forecast spending has risen by £8bn since March.
With a tough global economic backdrop, Healey has said the single biggest driver of better prospects for the UK would be an end to the Iran and Ukraine wars.
But in his interviews, Healey appeared to take a more cautious view than the prime minister on the potential for growth from rejoining Europe or the single market. Asked by LBC if growth would be stronger if the UK were in the EU or the single market, Healey replied: “Well, I don’t actually accept that. Brexit has certainly hit our level of growth. It’s certainly hit our level of trade. But we had a referendum. We’re out of the European Union. The challenge for me now is how do we make the best of an economy which this year has proved remarkably resilient.”
Asked later by Channel 4 if he, like Andy Burnham, hoped for the UK to re-enter the bloc in his lifetime, Healey said: “I’m older than Andy Burnham. I don’t expect to see that.”
The chancellor put measures to ease the cost of living at the heart of his first budget, including a £100 winter cost of living payment for most households. However, critics lined up on Thursday to accuse him of taking a “scattergun” approach – and of not hitting Britain’s banks hard enough to fund the package.
The Resolution Foundation thinktank said Healey had failed to target energy support to the households that need it most ahead of a difficult winter, with bills expected to rise sharply in January and the Bank of England to raise interest rates next week.
Ruth Curtice, Resolution’s chief executive, said: “Faced with a tough backdrop amid global economic turmoil, the chancellor delivered a scattergun budget that did little to address the sharp challenges facing Britain.
“Cost of living support is being spread far too thinly and will leave even those families receiving help facing higher energy bills than they did during the last energy price shock.”
Paul Nowak, the TUC’s general secretary, has strongly advocated for a bank windfall tax to fund energy support. He said he welcomed Healey’s approach, but would be pushing for him to go further.
The chancellor has doubled the surcharge banks pay on their profits from 3% to 6% for 15 months. Novak said: “It was right to tax banks to help people with their energy bills, but I think banks could have been asked to pay a fairer share. He’s going to review it in 15 months. We’re going to be looking as part of that review – if banks are still making windfall profits – for him to extend and increase the bank tax.”
As well as casting doubt on whether Healey’s future spending plans are realistic, the IFS said the £15bn headroom, or buffer, he has left himself against Labour’s fiscal rules could easily be eroded by higher than expected energy costs.
The chancellor allowed the buffer to absorb some of the impact of the Iran war, which has driven up the government’s cost of borrowing. At the time of the spring statement, Rachel Reeves had built up headroom of £24bn.
Miller said that was a “reasonable” decision to make, but “a lower buffer leaves the chancellor more exposed to future bad news”.
