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Economists say new spending commitments on cost-of-living support and defence leave limited room within existing public finances without raising taxes, cutting spending, or increasing borrowing.
The UK government may soon face difficult financial decisions after a leading economic think tank warned that Prime Minister Andy Burnham has little room to increase government borrowing.
According to the National Institute of Economic and Social Research (NIESR), the government's recent cost-of-living commitments and increased defence spending will likely require either higher taxes or spending cuts elsewhere if fiscal stability is to be maintained.
The warning comes just days after Burnham announced several measures aimed at easing pressure on households, including lower electricity bills and restoring the £2 bus fare cap across most of England.
NIESR believes that ongoing inflationary pressures, partly driven by the economic impact of the Iran conflict, will continue to strain the UK's public finances.
The think tank argues that relying on additional borrowing is no longer a sustainable option because government debt is already under significant pressure.
As a result, policymakers may need to make difficult decisions about:
Since taking office, Prime Minister Andy Burnham has announced several policies designed to help households cope with rising living costs.
Key measures include:
While these initiatives have been welcomed by many households, economists warn that they also increase pressure on the government's budget.
Stephen Millard, Deputy Director for Macroeconomics at NIESR, stated that there is very limited capacity for additional government borrowing.
According to the institute, funding the government's new commitments will likely require one or more of the following:
Millard suggested that tax reforms could include:
He also indicated that if other options prove insufficient, income tax increases may eventually need to be considered, despite Labour's existing pledge not to raise taxes on working people.
Before taking office, Labour pledged not to increase taxes that directly affect working people, including:
Prime Minister Burnham has said he intends to honour that commitment.
However, economic analysts believe maintaining that promise while introducing additional spending measures could become increasingly difficult if economic conditions deteriorate.
NIESR's latest economic outlook predicts that UK inflation will remain above the Bank of England's 2% target for an extended period.
The institute forecasts:
Persistent inflation would continue to increase government spending while reducing household purchasing power.
The think tank also believes the Bank of England may delay interest rate cuts until 2028.
If this forecast proves accurate, households and businesses could continue facing:
Higher interest rates also increase the government's own borrowing costs, adding further strain to public finances.
NIESR Director David Aikman warned that the UK's national debt has steadily increased following every major economic shock over the past two decades.
He argued that simply maintaining current policies may not be enough to stabilise public finances.
According to the institute, stronger fiscal reforms may be required to prevent government debt from continuing to rise over the coming years.
The UK Treasury defended the government's approach, stating that it remains committed to its fiscal rules while continuing to invest in essential public services.
Officials said maintaining fiscal discipline is necessary to support both economic stability and national security.
The government's efforts to reduce living costs may provide short-term financial relief for many families.
However, economists caution that funding these commitments without increasing borrowing will require difficult policy decisions in the months ahead.
Potential outcomes could include:
The government's next budget is expected to provide greater clarity on how these promises will be financed while balancing long-term economic stability.
Prime Minister Andy Burnham's early cost-of-living initiatives have been widely welcomed, but economic experts warn that financing these commitments will require careful fiscal planning. With borrowing capacity limited and inflation expected to remain elevated, the government may soon face difficult choices between tax reform, spending reductions, or revisiting long-standing fiscal commitments.
Economists say new spending commitments on cost-of-living support and defence leave limited room within existing public finances without raising taxes, cutting spending, or increasing borrowing.
According to NIESR, government debt is already under pressure, and additional borrowing could further strain public finances and increase long-term debt costs.
No decision has been made. However, economists suggest tax reforms or increases may eventually be considered if spending commitments continue to grow.
The National Institute of Economic and Social Research (NIESR) is one of the UK's leading independent economic research organisations that regularly publishes forecasts and policy analysis.
NIESR expects UK inflation to peak around 3.8% in early 2027 before gradually returning to the Bank of England's 2% target.
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