A leading think tank is urging the new Prime Minister to outline how he plans to fund his cost of living measures
Andy Burnham has been told he must either raise taxes or cut spending in a concerning ultimatum, as there is "no scope" for extra borrowing.
The National Institute of Economic and Social Research (Niesr) has called on the new Prime Minister to outline how he plans to pay for his recently announced cost-of-living and defence commitments, cautioning that further Government borrowing is simply not an option.
The respected economic think tank warned that the Iran war is driving more stubborn inflationary pressures, which will squeeze the new administration's fiscal room for manoeuvre.
Stephen Millard, Niesr's deputy director for macroeconomics, questioned whether the funding plans behind the Labour's pledges had been properly considered.
He said: "There's clearly no scope for increasing borrowing, so it is about choices. 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."
Last week, Mr Burnham declared that his administration will be a "cost of living Government" after years of hiked grocery prices and energy bills.
Together with his newly appointed Chancellor John Healey, the Prime Minister has since unveiled a series of support measures for households.
Among the announcements are plans to remove VAT from electricity bills starting in October, alongside an extension of the £2 cap on bus fares for the whole of 2027.
The Government has also reaffirmed its commitment to raising defence expenditure to 3.5 per cent of gross domestic product (GDP) by 2035.
Mr Burnham indicated that he and Mr Healey are working to ensure the defence investment plan is "fully funded" before the autumn Budget.
"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 Millard said.
Niesr expects consumer prices index (CPI) inflation to climb to a peak of 3.8 per cent in February 2027, with the conflict in Iran pushing price growth higher for longer.
The think tank now anticipates CPI will not return to the Bank of England's 2 per cent target until early 2029, a year later than previously forecast.
Interest rates are projected to remain at 3.75 per cent throughout 2026 and 2027, according to the institute's latest modelling.
On growth, Niesr revised its forecast for the UK economy upwards to 1.1 per cent this year, from the 0.9 per cent it had predicted in the spring, reflecting stronger-than-anticipated recent data.
However, the Middle East energy shock has cost the British economy an estimated £15billion in lost GDP, the think tank's analysis found.
Mr Milliard pointed to the welfare budget as "an obvious place to look" and singled out the pension triple lock as "very, very expensive, and will get more expensive as we age."
The economist also floated the idea of replacing council tax with a land value tax system and removing certain VAT exemptions as potential revenue-raising measures.
