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 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.