Prime Minister Andy Burnham faces a fiscal challenge in funding his recent cost-of-living pledges, as a major think tank has determined he has no room to increase borrowing. The National Institute of Economic and Social Research (Niesr) stated that Burnham will need to raise taxes or implement spending cuts to meet his commitments.
Burnham, who assumed office last week, has announced measures such as reducing electricity bills and lowering the bus fare cap to £2 in most of England. However, Niesr warned that the ongoing effects of the Iran war are expected to keep inflation elevated, further straining public finances.
The think tank questioned whether the Prime Minister had fully considered the financial implications of his promises. Stephen Millard, Niesr's deputy director for macroeconomics, emphasized that "there's clearly no scope for increasing borrowing, so it is about choices."
Labour's manifesto included a pledge not to increase taxes for working individuals, a promise Burnham has stated he intends to uphold. Niesr suggested that cost-of-living measures could be financed through tax reform, such as changes to how taxes are applied rather than increasing marginal rates, or through spending reductions. Millard pointed to the welfare budget as a potential area for review, noting that the triple lock on pensions is a significant and growing expense. Other options proposed include reforming council tax towards a land value tax system or eliminating certain VAT exemptions. Millard also suggested that if these measures were insufficient, the government might need to consider increasing the income tax rate, potentially breaking the manifesto promise.
Niesr projects that inflation will continue to rise until February 2027, reaching a peak of 3.8% before eventually returning to the Bank of England's 2% target. The think tank does not anticipate the central bank will lower interest rates until 2028. According to Niesr Director David Aikman, simply maintaining the current fiscal course is insufficient to prevent the national debt from increasing, citing that every major economic shock this century has led to a higher debt ratio that has not been reversed.
A spokesperson for the Treasury stated that the government remains committed to its fiscal rules while continuing to invest in essential public services. The spokesperson added, "Fiscal discipline is the bedrock of economic stability and national security."