The National Institute of Economic and Social Research cautioned that Prime Minister Andy Burnham faces constrained public finances and will need to pursue either tax increases or spending reductions to finance his recent policy announcements, which include electricity bill cuts and reduced bus fares.
Since taking office the previous week, Burnham has introduced several measures aimed at addressing cost-of-living concerns. However, the institute noted that persistent inflation stemming from the Iran war continues to pressure public finances, raising questions about how the government intends to fund its commitments. Stephen Millard, the institute’s deputy director for macroeconomics, stated there is no realistic scope for increased borrowing, leaving policymakers with difficult choices between revenue and expenditure options.
The government committed during its election campaign to avoid raising taxes on working people, including income tax, VAT, and national insurance contributions—a pledge Burnham has pledged to maintain. The think tank suggested that cost-of-living support could be financed through tax reform rather than rate increases, or through spending restraint. Millard identified potential areas for examination, including welfare spending and pension arrangements. He also mentioned possible reforms to council tax systems or adjustments to VAT exemptions, while noting that income tax rate changes might ultimately prove necessary to fulfill manifesto promises.
The institute projected inflation will continue rising until February 2027, reaching 3.8% before declining toward the Bank of England’s 2% target. It also indicated that interest rate cuts are unlikely before 2028. Director David Aikman emphasized that passive approaches will prove insufficient to prevent national debt from increasing, noting that previous economic shocks this century have consistently driven debt ratios higher without subsequent reversal.
The Treasury responded by affirming its commitment to fiscal rules while prioritizing investment in public services, stating that fiscal discipline forms the foundation of economic stability and national security.
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