Burnham has no scope to increase borrowing, think tank warns

Prime Minister Andy Burnham faces mounting pressure to either raise taxes or cut public spending in order to finance his new pledges on defense and cost-of-living support, according to a prominent economic think tank.

Since stepping into office last week, Burnham has introduced a series of initiatives, including reductions in electricity bills and lowering the bus fare cap across most of England back down to 2 pounds. However, the National Institute of Economic and Social Research (Niesr) has cautioned that public finances will remain squeezed by persistently high inflation driven by the ongoing war in Iran.

Niesr questioned whether Burnham had fully considered how these expensive promises would be funded, reiterating that the prime minister must ultimately choose between increasing tax revenues or reducing spending elsewhere. This creates a direct political dilemma, given Labour's core manifesto pledge not to increase income tax, VAT, or national insurance contributions for working people—a promise Burnham has stated he intends to uphold.

Stock photo for illustration only, not from the actual event

Millard noted that Niesr advocates for funding cost-of-living initiatives through higher taxes—potentially via tax reform rather than raising marginal rates—or through targeted spending cuts. He pointed out that the welfare bill is an obvious target, while the pension triple lock mechanism is exceptionally expensive and will only grow costlier as the population ages. Other suggested options included reforming council tax into a land value tax system or scrapping specific VAT exemptions.

Additionally, Niesr announced on Wednesday that it expects inflation to continue climbing until February 2027, peaking at 3.8% before gradually easing back toward the Bank of England's 2% target. In its latest economic outlook, the think tank stated it does not anticipate any interest rate cuts by the central bank until 2028. Niesr Director David Aikman warned that simply treading water is insufficient to prevent national debt from rising, noting that every major shock this century has ratcheted the debt ratio higher with no reversals.

In response, the Treasury stated that the government remains committed to its fiscal rules while continuing to invest in essential public services. A Treasury spokesperson emphasized that fiscal discipline serves as the absolute bedrock of economic stability and national security.

Source: BBC Business