Prime Minister Andy Burnham has announced a rake of cost-of-living measures since taking office last week. A major think tank has now said he will have to raise taxes or cut spending to meet his pledges on defence and the cost of living.
What did the think tank warn?
The National Institute of Economic and Social Research (Niesr) warned the public finances will continue to be squeezed by more persistent inflation as a result of the Iran war. It questioned whether Burnham had "fully thought through" how his promises would be paid for, but said the prime minister will have to raise taxes or cut spending elsewhere.
Burnham has announced a series of new measures since assuming office last week, including cuts to electricity bills and bringing the bus fare cap in most parts of England back down to £2.
Stephen Millard, Niesr's deputy director for macroeconomics, said:
"There's clearly no scope for increasing borrowing, so it is about choices."
How could Burnham pay for his pledges?
Labour's manifesto pledge was to not increase taxes for working people - including income tax, VAT and national insurance contributions - which Burnham has said he will uphold. Millard said Niesr was advocating for cost-of-living measures to be funded through higher taxes –
"which could involve tax reform rather than higher marginal rates"– or spending cuts.
He said:
"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."
What does Niesr expect to happen next?
Niesr also said on Wednesday it expects inflation to keep rising until February 2027, peaking at 3.8% before falling back to the Bank of England's 2% target. The think tank said in its latest economic outlook that it does not believe the central bank will cut interest rates until 2028.
Its Director David Aikman said that
"treading water is not enough"to prevent the national debt from rising.
"Every major shock this century has ratcheted the debt ratio higher, and none of that increase has been reversed,"he said.
What has the Treasury said?
The Treasury said the government will stick to its fiscal rules while investing in
"the public services people rely on".
"Fiscal discipline is the bedrock of economic stability and national security,"a spokesperson said.
