John Healey’s “risky” Budget has exposed Britain to further economic shocks and failed to tackle the “worst decade for growth” for household incomes on record, an influential think tank has warned.

The chancellor was told that the reduced financial headroom he has left himself with as a result of his first Budget could leave the country “more exposed to future bad news”, as government departments also face real-terms value cuts to their spending.

In a damning assessment of the government’s spending plans, the Institute for Fiscal Studies (IFS) hit out at the “temporary cost of living measures” unveiled, which it said were no substitute for “a strong economy”, appearing to take aim at Andy Burnham’s approach since he became prime minister of introducing only minor reductions to energy bills and capping the price of bus tickets at £2.

It comes as another leading thinktank, the Centre for Social Justice (CSJ), found that a “£33bn stealth tax on workers” which it claims has been “wiped out” with increased payments on benefits.

The CSJ has looked at the impact of continuing to freeze income tax thresholds which drag more people into paying the basic rate of 20p, higher rate of 40p and top rate of 45p - equating to £33.1bn in extra revenue. But it noted that benefits are set to rise by £3.4bn.

Joe Shalam, policy director at CSJ, said: “Sickness and disability benefit spending is now forecast to exceed £100bn by the end of the decade and 6.7 million people are on out-of-work benefits, while the rest of the country is dragged into higher tax to pay for inaction. Public support for the system there to protect the most disadvantaged is being pushed to breaking point.”

In its analysis of Mr Healey’s Budget, the IFS said there were “risks” in his approach, which come amid a period of dismal growth for household incomes.

IFS director Helen Miller said while it was “reasonable” to allow headroom to fall to absorb higher borrowing costs, she cautioned: “Higher borrowing will need to be paid for. A lower buffer leaves the Chancellor more exposed to future bad news. There are risks to this approach.”

The government’s fiscal headroom has been slashed by over £8bn to £15bn ​in the 2029/30 fiscal year, down from the budge watchdog, the Office of Budget Responsibility’s (OBR), March estimate of £24 bn under Rachel Reeves.

Ms Miller said the chancellor must do more to tackle slow economic growth, added: “It’s depressing. No amount of temporary cost of living packages will fix that. We need a stronger economy.”

The headline cost of living measure unveiled by the chancellor on Wednesday was the £100 payment for around 20 million homes to help with the cost of energy bills.

While it will likely be welcomed by some of the poorest household, many have said it does not go far enough.

The Resolution Foundation, set up to help people on lower and middle incomes, said the Budget would do little to address “the sharp challenges facing Britain”.

The rebuff for Mr Healey's package of measures is particularly embarrassing because until two years ago the think tank was headed by pensions minister Torsten Bell.

The Confederation of British Industry (CBI) also said the chancellor had delivered a “nothing” Budget which did not “meet the scale of that ambition” set out by Mr Burnham.

Meanwhile, the OBR said the UK’s “economic and fiscal position remains very challenging” after almost two decades of shocks and stagnation, pushing up the national debt.

Professor David Miles of its Budget Responsibility Committee (BRC) warned it marked a “pretty grim picture”.

“If you go back to just before Covid and take that as your base, where we are right now which is what some seven years later, is virtually no growth in per person real household disposable income,” he said.

“That’s pretty unusual in the history of the UK.” He added: “It’s been a dismal period in British economic history.”

Ms Miller also criticised Mr Healey’s “small, unhelpful fiddling with the tax system”, leaving it in a “mess” and calling his new Founders’ Relief, a new capital gains tax relief for founders and early investors of high-growth UK companies, “bonkers”.

“It is far more complex than it should be,” she said.

“And that is because, Budget after Budget, chancellors make seemingly small tweaks that lack principle and don’t systematically move us to a better place. This approach gives us more complexity and more instability. Both have real economic costs.”

The IFS also warned Mr Healey’s decision to leave government departmental statement largely unchanged means “means that the real-terms value of budgets has been cut” in the face of higher inflation.

In Wednesday’s speech in the Commons, Mr Healey committed to spending 3 per cent of economic output on defence by 2030, and to “fully funding” the £4.7bn black hole in the defence investment plan (Dip) left by Sir Keir Starmer.

Departments across government will be asked to reduce their capital budgets by 1 per cent each between 2027-28 and 2029-30 to raise some £3bn. The remaining £1.7bn shortfall will be made up from an “unallocated contingency in the Treasury’s capital reserve”, the Budget said.

“It effectively implies that some public services will see real-terms cuts in next year’s Spending Review,” Ms Miller said.

“Avoiding the cuts implied by both higher inflation and tight envelopes could plausibly require a top-up of £17 billion in 2030-21. That’s true even before thinking about the £11 billion needed to fund defence plans.”

Bee Boileau, a research economist at the IFS, said the plans imply “really very tough times ahead for public services” as a result of inflation, slow spending growth and commitments to defence spending.

“The government could deliver these, but these will imply setting out lots of real terms cuts to departments over the coming years, and there’ll be huge pressure to put in some top-ups,” she said.

“Next year’s spending review will be the real crunch point for this government.”

Ms Miller also said Mr Healey’s decision to fund a £4.7bn black hole in defence spending in part by drawing down on reserves weakens the government’s ability to weather future global shocks.

In a scathing rebuke of the lack of clarity on defence spending in the Budget, she said she was still “no wiser” as to how Mr Healey planned to hit his target of spending 3 per cent of GDP on defence by 2030.

“I am grumpy about how the chancellor decided to fund the relatively small hole in the defence investment plan – that’s the plan that gets defence spending to 2.7 per cent of GDP next year and keeps it there until 2029-30,” she said.

“Much of it came from further cuts to the capital budgets of other government departments. Fine. Priorities change but the rest came from raiding reserves in future years.

“This is worth drawing out: John Healey has now spent 25 per cent of the capital reserve set aside for the next three years. He’s also spent 40 per cent of the day-to-day reserve.

“This is categorically not what the reserves are for. Drawing down reserves is another way the government has reduced its buffer against future shocks.”