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A prominent think tank has indicated that Prime Minister Andy Burnham will need to either increase taxes or reduce public spending in order to fulfill his commitments related to defence and addressing the cost of living. Since taking office last week, Burnham has introduced several initiatives, such as reducing electricity bills and lowering the bus fare cap to £2 in most parts of England.
The National Institute of Economic and Social Research (NIESR) expressed concerns about the pressure inflation—exacerbated by the ongoing conflict in Iran—will place on public finances in the coming years. The institute questioned whether the prime minister has fully considered how to fund his policy promises, pointing out that without adjustments, the government’s financial position will remain strained.
Stephen Millard, deputy director for macroeconomics at NIESR, emphasized that borrowing capacity is limited, so difficult fiscal choices will be necessary. While Labour’s manifesto pledged not to raise taxes on working individuals—covering income tax, VAT, and national insurance contributions—Millard suggested that the institute supports covering the costs of living measures through higher taxes, potentially involving tax reforms rather than simply raising marginal rates, or alternatively through spending cuts. He identified welfare spending, the costly triple lock on pensions, and reforms to council tax or the removal of some VAT exemptions as possible areas for savings. If these steps proved insufficient, he said, breaking the manifesto commitment on income tax might be unavoidable.
In its latest economic outlook, NIESR also forecasted that inflation will continue to climb until February 2027, reaching a peak of 3.8%, before easing back to the Bank of England’s target rate of 2%. It does not expect interest rate cuts from the central bank until 2028. David Aikman, Director of NIESR, warned that simply maintaining the status quo would not stop the growth of the national debt, noting how each major shock over the past two decades has increased the debt ratio without any subsequent reduction. Meanwhile, the Treasury affirmed the government’s commitment to adhering to fiscal rules while investing in essential public services, underscoring that “fiscal discipline is the bedrock of economic stability and national security.
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