IFS tells Reeves to be bold or face more economic pain

Tinkering around the edges at the next Budget risks another year of economic pain, a leading think tank has warned, urging the chancellor to take “bold action” in November.

- MILLIE COOKE POLITICAL CORRESPONDENT

The Institute for Fiscal Studies (IFS) said it expects Rachel Reeves will need to find at least £22bn next month, thanks to rising borrowing costs, weaker growth forecasts and spending commitments made since spring.

But the IFS said there was a “strong case” for the chancellor to go further, arguing that a £10bn buffer - the amount of headroom Ms Reeves previously left herself against her self-imposed debt rules — was not enough to ensure stability and would leave her “limping from one forecast to the next”. This funding, the think tank said, is likely to have to come from tax rises.

While the think tank didn’t rule out spending cuts entirely, they said they would “pose challenges” due to a lack of parliamentary support for welfare cuts and the fact that departmental budgets were only agreed in June.

Speaking about the narrow headroom the chancellor left at the last Budget, IFS economist Ben Zaranko said: “The reason why this causes so many problems is when you have a pass-fail rule, and you leave such a narrow margin against it, even fairly standard, typical forecast movements can be enough to push you onto the wrong side of the line. That means policy has to respond overly frequently... and that volatility itself creates damage.”

The £22bn figure also does not include the cost of widely expected announcements on abolishing the two-child benefit cap and maintaining the freeze on fuel duty.