A think tank has urged Andy Burnham to raise taxes or cut public spending to fund new cost-of-living and defence commitments, as it warned there was no scope for extra Government borrowing.
The National Institute of Economic and Social Research (Niesr) said the new Government will be squeezed by more persistent inflation as a result of the Iran war.
The organisation is expecting Consumer Prices Index (CPI) inflation to rise to peak at 3.8% in February 2027 and take longer to slow to the 2% target level in early 2029, rather than a previous forecast of 2028.
Its forecasts show the Bank of England keeping interest rates held at 3.75% through this year and next.
Mr Burnham pledged to lead a “cost-of-living Government” when he entered Downing Street as Prime Minister last week.
Since then, he and newly appointed Chancellor John Healey have announced a raft of support packages, including a promise to cut VAT from electricity bills in October and cap bus fares at £2 throughout 2027.
Stephen Millard, Niesr’s deputy director for macroeconomics, said he did not think cost-of-living support measures were the “answer” and that it was the “Bank of England’s job to hit the inflation target”.
“There’s clearly no scope for increasing borrowing, so it is about choices,” he went on.
“I’m yet to be convinced that how these things will be funded has been fully thought through, but there is going to be a budget in October.
“Our advice would very much be to fund these through higher taxes – which could involve tax reform rather than higher marginal rates – or cuts in spending elsewhere.”
Mr Burnham has also reiterated that the Government stands behind its previous pledge to spend 3.5% of gross domestic product (GDP) on defence by 2035.
He said he and Mr Healey were working towards ensuring the defence investment plan was “fully funded” ahead of the budget in the autumn.
In terms of specific measures to raise funds, Mr Millard suggested: “People have talked a lot about the welfare bill – that is an obvious place to look.
“The triple lock on pensions, that is very, very expensive, and will get more expensive as we age.”
He also pointed to potentially 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,” the economist said.
Labour’s manifesto pledge was to not increase taxes for working people, which Mr Burnham has pledged he will stick to.
Niesr’s forecasts also show the UK economy rising by 1.1% this year, higher than the 0.9% projected in spring due to stronger-than-expected data published in recent months.
But according to the think tank’s analysis, the UK economy has lost out on an estimated £15 billion worth of GDP as a result of the Middle East energy shock.
