The warning puts fresh pressure on Labour ahead of the Budget on 28 October, following significant tax increases under former Chancellor Rachel Reeves and further commitments on defence, health and social care.
According to the Institute for Fiscal Studies' Green Budget 2026, the Government could need approximately £20bn in additional departmental spending in 2030–31 if it increased defence spending to 3 per cent of GDP, raised health spending by 2.7 per cent annually in real terms and avoided real-terms cuts to other departments.
Increasing defence spending from 2.7 per cent to 3 per cent of GDP would itself cost approximately £11bn more in 2030–31. The IFS estimates that maintaining health spending growth and avoiding cuts elsewhere would account for the remaining pressure in its illustrative £20bn scenario.
Allowing for plausible additional pressures from public sector pay and weaker-than-planned productivity growth could increase that illustrative requirement to around £35bn a year by 2030–31.
The figure is not an existing Treasury shortfall or an unavoidable tax bill. It illustrates the potential cost of meeting those spending ambitions without reducing services elsewhere.
Ministers could instead reprioritise existing budgets, scale back spending ambitions, improve productivity or accept reductions in the quality or availability of some public services.
The IFS nevertheless warned that the Government's existing plans leave limited room for additional commitments without difficult trade-offs.
Higher inflation is already reducing the spending power of departmental budgets, while public sector pay and productivity pressures threaten to increase the cost of delivering existing services.
In its latest fiscal assessment, published on Monday, the IFS also highlighted the competing effects of inflation and borrowing costs on the public finances.
Higher borrowing costs could add approximately £10bn to annual borrowing in 2029–30, although higher nominal tax revenues could offset part of the pressure.
The think tank's illustrative estimate of the Chancellor's fiscal headroom stands at around £20bn, compared with the £24bn forecast in March.
That headroom measures the margin against the Government's fiscal rules. It is separate from the potential £35bn departmental spending requirement, which concerns the resources needed to deliver particular public service commitments.
The distinction matters. A Chancellor can technically meet fiscal rules while still facing considerable pressure over how much money individual departments receive.
Helen Miller, Director of the Institute for Fiscal Studies, warned in the think tank's official statement that a "steady-as-she-goes" Budget was not an option for the Chancellor.
Keeping inherited spending plans unchanged would mean accepting cuts to the quality or quantity of some public services, particularly if higher defence spending had to be accommodated within existing departmental budgets.
Prime Minister Andy Burnham has resisted proposals to fund higher defence spending through reductions in welfare.
Speaking on The Rest Is Politics podcast, Burnham argued against treating defence and social security as competing priorities, warning that leaving large numbers of young people outside education, employment or training would weaken Britain's resilience.
Healey has also acknowledged the need to control the growing benefits bill, creating a difficult political balance between Labour's social commitments and the Chancellor's responsibility for the public finances.
The IFS assessment focuses primarily on departmental spending, which covers services including the NHS, schools and defence. Welfare benefits are accounted for separately in the public finances, although changes to benefit expenditure could affect the Government's wider fiscal choices.
Under existing plans, day-to-day departmental spending growth is expected to slow considerably in the coming years.
The IFS warned that maintaining overall spending totals would leave some departments facing real-terms reductions, particularly if health and defence continued to receive priority.
Its analysis also suggests that public service productivity improvements assumed in current plans are considerably more ambitious than those achieved historically.
If those improvements fail to materialise, departments could require additional funding simply to maintain existing services.
The scale of the challenge comes after substantial tax increases under Reeves.
According to Reuters' reporting ahead of the IFS assessment, Reeves announced more than £60bn in tax increases across her two previous Budgets.
Further increases would add to the burden on households and businesses already facing higher operating costs and pressure on disposable incomes.
Yet Labour's manifesto commitments restrict some of the Chancellor's options. The party pledged in its 2024 manifestonot to increase the main rates of income tax, National Insurance or VAT, while promising to cap corporation tax at 25 per cent.
Those commitments have intensified debate over whether ministers might consider changes to capital gains tax, wealth-related taxation or property taxes.
According to Financial Times reporting, Healey has ruled out lowering the threshold for the planned mansion tax from £2m to £1.5m, following opposition from Labour MPs.
Meanwhile, retail industry warnings reported ahead of the Budget have highlighted objections to higher business rates from major retailers, including John Lewis. Treasury sources have also indicated that there are no plans for a new warehouse tax.
Other possible changes to capital gains tax and wealth-related taxation remain matters of speculation rather than confirmed Budget measures.
The IFS has cautioned that restricting changes to the largest taxes could leave the Chancellor relying on smaller taxes that may be more economically damaging.
Its warning reflects a broader dilemma for Labour. Raising revenue could help fund public services and defence commitments, but poorly designed tax increases could discourage investment or weaken economic growth.
Healey has pledged to maintain fiscal discipline rather than simply increase borrowing to accommodate every spending demand.
That commitment comes amid concerns about government borrowing costs and the need to maintain confidence in Britain's public finances.
Bank of England Governor Andrew Bailey has also emphasised the importance of credible fiscal policy and financial stability, although his wider warnings should not be interpreted as a specific forecast of another mini-Budget crisis.
The Conservatives, meanwhile, have argued that Labour should place greater emphasis on controlling welfare expenditure rather than imposing further tax increases.
Shadow Chancellor Andrew Griffith has criticised Labour's approach to business taxation and the economic consequences of its policies, with recent reporting quoting his criticism of the Government's economic record.
The political disagreement leaves Healey facing a series of difficult decisions before his first Budget.
Labour has promised to strengthen defence, protect public services and maintain support for those who depend on the welfare system. Delivering those commitments while keeping borrowing under control will require choices about taxation, spending priorities and the performance expected from government departments.
The £35bn is not a bill already waiting to be paid. It is a warning about what Labour's spending ambitions could cost if ministers are unwilling to make difficult choices elsewhere.
The Chancellor must now decide how far Labour is prepared to adjust its spending ambitions, raise additional revenue or reduce expenditure elsewhere.
The Government's choices will determine not only the credibility of its fiscal plans, but also how the costs of those decisions are shared between taxpayers, businesses, welfare recipients and the public services on which millions depend.
Great British PAC reaction
Richard Thomson, National Director of Great British PAC, said:
"The Institute for Fiscal Studies has just confirmed what many of us already knew. Chancellor Healey needs around £35 billion through tax rises or benefit cuts simply to protect basic public services and fund the defence spending we desperately need.
"But the Prime Minister refuses to touch welfare. So the bill falls, yet again, on households and businesses. Another punishing Budget. Higher taxes on work, on enterprise, on the people who actually generate the wealth this country needs.
"This is not responsible government. It is the same old politics of delay and denial. We cannot keep loading the productive with ever-higher taxes while refusing to confront waste and dependency. Defence must be properly funded, public services must be protected, and that means making hard choices now not sending the invoice to ordinary hard working people again.
"Britain cannot afford another Budget of cowardice.“