Burnham has no scope to increase borrowing, think tank warns
The Prime Minister has announced a series of cost-of-living measure since taking office but is facing questions about how he will fund them.
Prime Minister Andy Burnham, who took office last week, has unveiled a range of cost-of-living initiatives. However, a prominent think tank has cautioned that he will need to either increase taxes or reduce expenditures to fulfill his commitments regarding defense and the cost of living.
Since assuming the premiership, Burnham has announced several new measures, including reductions in electricity bills and reinstating the £2 bus fare cap across most of England. Despite these efforts, the National Institute of Economic and Social Research (Niesr) has warned that the nation's public finances will remain under pressure due to persistent inflation, exacerbated by the Iran war.
Niesr questioned whether Burnham had "fully thought through" the funding mechanisms for his promises, asserting that he would ultimately need to raise taxes or implement spending cuts elsewhere. Stephen Millard, Niesr's deputy director for macroeconomics, stated, "There's clearly no scope for increasing borrowing, so it is about choices."
Burnham has pledged to uphold Labour's manifesto promise of not increasing taxes for working people, which includes income tax, VAT, and national insurance contributions. Millard indicated that Niesr advocates for cost-of-living measures to be financed through higher taxes – potentially involving "tax reform rather than higher marginal rates" – or through spending cuts.
Millard suggested several areas for potential cuts, noting, "People have talked a lot about the welfare bill – that is an obvious place to look." He also highlighted the "very, very expensive" triple lock on pensions, which "will get more expensive as we age." Other possibilities he mentioned included reforming council tax to transition towards a land value tax system or eliminating certain VAT exemptions. Millard added, "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."
Niesr also projected on Wednesday that inflation is expected to continue rising until February 2027, reaching a peak of 3.8% before declining to the Bank of England's 2% target. The think tank's latest economic outlook also indicated that it does not anticipate the central bank cutting interest rates until 2028.
David Aikman, Niesr's Director, emphasized that "treading water is not enough" to prevent an increase in the national debt. He remarked, "Every major shock this century has ratcheted the debt ratio higher, and none of that increase has been reversed."
In response, the Treasury affirmed that the government intends to adhere to its fiscal rules while simultaneously investing in "the public services people rely on." A spokesperson for the Treasury stated, "Fiscal discipline is the bedrock of economic stability and national security."