NIESR warns of a multi-billion-pound squeeze on public spending as inflation climbs and interest-rate relief stays out of reach, leaving little room for new pledges. The think tank forecasts inflation will peak at 3.8 percent and to keep rising until February 2027, and it does not expect the Bank of England to cut rates before 2028. "There's clearly no scope for increasing borrowing, so it's about choices," Stephen Millard, deputy director for macroeconomics at the National Institute of Economic and Social Research, said. That combination leaves limited headroom to fund Prime Minister Andy Burnham's early cost-of-living promises without either tax rises or spending cuts ahead of the autumn Budget.
"Treading water isn't enough," David Aikman, director of NIESR, said, framing the institute's central judgement that the new government faces a constrained fiscal position. NIESR's latest economic outlook argues persistent higher inflation, partly driven by the Iran war and recent energy price moves, will push up debt-servicing costs and reduce the scope for extra borrowing.
How large is the problem? NIESR forecasts inflation will rise to a peak of 3.8 percent before easing back toward the Bank of England's 2 percent target, and it expects the Bank not to cut rates until 2028. The think tank emphasised that every major shock this century has raised the debt ratio and left it unreversed, leaving the UK with high borrowing costs and limited fiscal headroom.
How do Mr Burnham's announcements interact with that position? In his first week the prime minister announced measures including energy bill relief and restoring a £2 single bus fare cap in most of England.
NIESR questioned whether those promises have been fully costed and warned that trying to meet them through extra borrowing would raise future vulnerability to shocks.
What alternatives did the think tank set out? NIESR recommended funding cost-of-living support through tax changes or savings elsewhere rather than additional borrowing.
Mr Millard pointed to possible avenues such as reforming council tax toward a land value basis, removing some VAT exemptions, and examining the welfare bill and the triple lock on pensions. He noted that tax reform, short of across-the-board higher marginal rates, could be on the table, but that would mean breaking some manifesto pledges about not raising taxes on working people.
How big might the adjustments be? The institute flagged a multi-billion-pound squeeze on real spending by the end of the decade unless offset by tax rises or reallocation. NIESR also warned of downgraded growth forecasts, which would further squeeze the chancellor's available headroom for new measures.
What is the political pressure on the Treasury? NIESR's director said the government inherited the highest borrowing costs in the G7 and that rebuilding capacity to absorb future shocks requires a determined effort to bring debt down rather than extend it. A Treasury spokesperson said the government will stick to its fiscal rules while investing in public services and emphasised fiscal discipline as central to economic stability and national security.
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The autumn Budget is the decisive moment, when Chancellor John Healey must set out how recent announcements will be paid for and whether taxes, spending or both must be rebalanced.
This article was created with AI assistance.
