Prime Minister Andy Burnham and Chancellor John Healey are projected to face a £24 billion real-terms spending squeeze by the end of the decade, according to a new forecast from the National Institute of Economic and Social Research (NIESR). The think-tank warned that persistent inflation will necessitate "very difficult trade-offs" in the autumn Budget.
NIESR's analysis indicates that the ongoing conflict in Iran will continue to drive inflation upwards, with a projected peak of 3.8 percent next February. Inflation is expected to remain higher and more persistent than previously anticipated, not returning to the 2 percent target until 2029. This elevated inflation outlook will erode the real value of public spending increases, creating the substantial shortfall compared to earlier forecasts.
The think-tank raised questions about the political feasibility of such a squeeze on public services. The warning adds to the challenges already facing the Prime Minister and Chancellor, who are under pressure to commit to increased defense spending and fund existing policy announcements, such as energy bill and business rate reductions. NIESR cautioned that with limited capacity to increase borrowing without exacerbating high debt levels, these new commitments would likely require tax hikes or spending cuts in other areas.