Prime Minister Andy Burnham will have to raise taxes or cut spending to meet his pledges on defence and the cost of living, a major think tank has warned – just a week after he took office and announced a series of new measures.
Burnham has already cut electricity bills and restored the bus fare cap in most of England to £2. But the National Institute of Economic and Social Research (Niesr) said the public finances will continue to be squeezed by more persistent inflation as a result of the Iran war. It questioned whether Burnham had “fully thought through” how his promises would be paid for.
“Think tank Niesr warns PM Andy Burnham has no scope to increase borrowing, must raise taxes or cut spending.”
“There’s clearly no scope for increasing borrowing, so it is about choices,” said Stephen Millard, Niesr’s deputy director for macroeconomics. Labour’s manifesto pledge not to increase income tax, VAT or national insurance for working people – which Burnham has said he will uphold – limits those choices. Millard said Niesr was advocating for cost-of-living measures to be funded through higher taxes – “which could involve tax reform rather than higher marginal rates” – or spending cuts.
He pointed to the welfare bill and the triple lock on pensions as “an obvious place to look”, adding that the pensions commitment is “very, very expensive, and will get more expensive as we age”. He also suggested reforming council tax to move towards a land value tax system, or scrapping some VAT exemptions. “Once you’ve done all of that, then I’m afraid I would break the manifesto promise and would be looking at the income tax rate,” he said.
Niesr also said on Wednesday it expects inflation to keep rising until February 2027, peaking at 3.8% before falling back to the Bank of England’s 2% target. The think tank does not believe the central bank will cut interest rates until 2028.
Its director, David Aikman, said: “Treading water is not enough” to prevent the national debt from rising. “Every major shock this century has ratcheted the debt ratio higher, and none of that increase has been reversed.”
The Treasury said the government will stick to its fiscal rules while investing in “the public services people rely on”. A spokesperson added: “Fiscal discipline is the bedrock of economic stability and national security.”
The warning leaves Burnham facing an early test of his ability to balance Labour’s manifesto promises with the fiscal reality of a stretched economy.