Burnham Has No Scope to Increase Borrowing, Think Tank Warns

The National Institute of Economic and Social Research (Niesr) has delivered a sobering verdict on Prime Minister Andy Burnham’s government, warning that his plans to boost defence spending and ease the cost of living will require either significant tax hikes or deep spending cuts.

The Niesr’s economic outlook is grim: persistent inflation driven by the ongoing Iran war will continue to squeeze public finances until 2027. Inflation is expected to peak at 3.8% in February 2027 before falling back to the Bank of England’s 2% target.

Niesr deputy director Stephen Millard has been forthright about the need for tough choices: “There’s clearly no scope for increasing borrowing, so it is about choices.” This means Labour must confront the consequences of its spending commitments. The party’s manifesto pledge to keep taxes low for working people was always going to be difficult to keep.

The Treasury’s response has been defensive, reiterating its commitment to fiscal discipline while investing in public services. However, this does not address the underlying economic reality. Fiscal discipline is essential for economic stability and national security, but it does not meet the promises made during the election campaign.

Niesr has identified several areas where cost-of-living measures could be funded through higher taxes or spending cuts. These include reforming council tax to move towards a land value tax system, scrapping some VAT exemptions, and breaking Labour’s manifesto promise on income tax rates. While these suggestions are unpalatable for Labour supporters, they highlight the tough choices that Burnham now faces.

Niesr Director David Aikman has warned that “treading water is not enough” to prevent the national debt from rising. This is a sobering message for a government that promised to deliver more with less, and it raises questions about the long-term sustainability of Labour’s economic policies. The country navigates this treacherous economic landscape, Burnham will need to make some tough decisions soon.

Every major economic shock in recent history has driven up public debt, and none of these increases have been reversed. This is a harsh reality check for Labour’s plans – one that they can no longer afford to ignore. The question now is whether Burnham will take the Niesr’s warnings seriously or continue to peddle a budget-neutral fantasy.

Burnham’s budget bind is not just about Labour’s economic policies; it’s also about the party’s credibility and its willingness to make tough choices. The clock is ticking on this government’s economic stewardship, and it’s time for Burnham to get real about the state of the nation’s finances.