Chancellor John Healey faces having to find £35bn to avoid cuts to public spending while meeting defence promises in his first Budget, an influential think tank has warned.

The Institute for Fiscal Studies (IFS) said that if the government wants to raise defence spending to 3% of national income by 2030 and lift health spending without squeezing other departments, it will need a “top-up” of billions of pounds.

Higher inflation, caused by the Iran war, could eat into what the government hoped to spend on public services, meaning Healey will have to choose between spending cuts, tax rises, or a mixture of both, the IFS said.

The Treasury declined to comment.

The government is under growing pressure to show financial markets that it has a tight grip on finances as the cost of borrowing rises.

The IFS said that Healey must set out “credible” spending plans in the Budget, which will take place on 28 October.

“A ‘steady-as-she-goes’ Budget is not an option available to the chancellor,” said IFS director Helen Miller.

“Choosing to stay the course with the inherited tax and spending plans would mean allowing inflation to blow departments’ spending plans off course.

“Simply pencilling in implicit cuts that he has no intention of delivering would make the Budget a work of fiction,” she added.

Speaking ahead of the annual International Monetary Fund meeting this week, Healey said: “The consequences of conflict in the Middle East and Europe are hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home.

“But Britain and our allies can face up to these challenges together.”

He said his Budget “will build on this approach with fiscal discipline helping to deliver economic resilience” and give people “breathing space”.

Miller told the BBC’s Today programme that Healey had inherited spending plans for government departments where spending growth would slow in the coming years.

“[It] already looked likely that he would have to make spending cuts just to live within those,” she said. “Now, along comes the Middle East war, inflation goes up and those spending plans look very tight indeed.”

Added to that, the chancellor has said he wants to get defence spending up to 3% of national income. Under Keir Starmer’s leadership, Healey resigned as defence secretary in June in a battle with the Treasury over military spending.

Miller said: “You put all that together, if he wanted to do all of that within current spending plans he’s looking at having to cut some other services by something like £35bn.”

She said the government would have a “tough time” if it wanted to raise taxes to stop cuts to departments and fund defence spending.

Former chancellor Rachel Reeves announced billions of pounds in tax rises. Meanwhile, Labour pledged in its manifesto “not increase taxes on working people”, ruling out rises to National Insurance, income tax or VAT. Prime Minister Andy Burnham has said he will stick to that promise.

Miller said: “You’d really have to be scaping around and doing lots of small things to get up to big sums.”

The chancellor does not have to address spending totals in this Budget, and may choose to leave such decisions until future events – for example, next year’s Spring Statement or Spending Review – by which time the outlook for the economy could look very different.

But the IFS warned not addressing it would cast doubt on the credibility of the government’s plans.

Previous chancellors have relied on a similar strategy of pencilling in unrealistic future spending plans to ensure that they meet the fiscal rules on the day – only to change the plans further down the line.

Miller said Healey’s focus on fiscal discipline was a “good first start but what he needs to do is not just say he’s going to cut borrowing in coming years but actually deliver on those plans.”

The US-Israel war against Iran and Russia’s invasion of Ukraine have together helped drive up energy prices around the world.

These higher costs have been passed to customers via higher prices on shelves and at the pumps.

The wars have also contributed to a rise in the cost of UK government debt interest payments, adding to the pressure on Healey.

Although higher inflation will boost tax revenues, it will also eat into the value of departments’ cash budgets, the IFS said.

Like other analysts, the IFS thinks recent turbulence on bond markets and higher inflation will add around £10bn to forecasts for the government’s borrowing costs in 2029-30.

However, it still expects the government to meet its self-imposed fiscal rules – that it will only borrow for investment projects by the financial year 2029-30 and also be reducing debt as a percentage of GDP – not least as inflation pushes up tax revenues.

But it expects those rules to be met by a smaller buffer – known as “headroom” – of around £20bn. That is less than the £24bn buffer predicted at the time of the Spring Statement by the official forecaster, the Office for Budget Responsibility (OBR).

Recent indications have been that the markets would be comfortable with that degree of reduced headroom. The IFS also expects any “breathing space” help for households to be temporary and limited in scale.

However, the IFS warns that in such a volatile environment, its forecasts are exceptionally uncertain. And the official forecast from the OBR – which the chancellor relies on when making his plans – may come to a very different conclusion.