Andy Burnham faces economic challenges as funding needs rise
Andy Burnham has been warned that he will have to raise taxes or cut spending if he wants to fund his new priorities, in a grim analysis by one of the UK’s leading economic think tanks, reports BritPanorama.
Economists at the National Institute for Economic and Social Research (NIESR) caution the prime minister and new chancellor John Healey that “there is no capacity to borrow any more” and that inflation will push up the cost of living much higher than the Bank of England (BoE) is forecasting.
This warning comes amid questions over how Mr Burnham plans to pay for recent giveaways, including a £2 bus fare cap, cutting VAT from energy bills and slashing pub business rates by 20 per cent, all amounting to around £2 billion.
During a briefing in Westminster, NIESR director David Aikman stated: “It’s a tough, tough job being chancellor and I wouldn’t wish it on anyone.” According to NIESR’s findings, inflation is set to rise to 3.8 per cent next year, which could compel the BoE to hike interest rates again to bring it down to the government’s 2 per cent target.
In further bad news, economic growth, which recorded 0.6 per cent in the first quarter of the financial year and 0.4 per cent in the second, is forecast to plummet to 0.1 per cent in the third quarter. Mr Aikman added, “Borrowing is at capacity so spending commitments will have to be found through tax rises or spending cuts.”
The findings come after Mr Burnham made approximately £2 billion in new commitments in his first week, amid speculation that Mr Healey, who resigned as defence secretary over a £13 billion shortfall in defence spending, is looking to cover this gap through selling war bonds — a method his predecessor Ms Reeves criticized as “just another form of borrowing.”
The Treasury is also tasked with finding an additional £4.7 billion to address a black hole in current defence spending plans, alongside funding for Mr Burnham’s social care reforms and efforts to end rough sleeping. Mr Aikman highlighted the risks of more borrowing, suggesting it could lead to the UK “suffering an economic shock” due to uncertainties from the international environment, including the ongoing war in Ukraine and tensions involving the United States and Iran.
NIESR warned that Mr Healey faces a 4 per cent real spending squeeze by the end of the decade—equating to approximately £24 billion in 2023 prices—due to heightened and persistent inflation. This will lead to difficult trade-offs in the autumn Budget.
The annual NIESR economic outlook stressed that the government has incurred the highest borrowing costs in the G7, with public debt stabilising at a high level but lacking a clear path for reduction. Any new commitments regarding defence funding and improvements to living standards will need to be financed through taxation or reallocations, not additional borrowing.
Despite ongoing conflict in the Middle East and renewed disruptions in the Strait of Hormuz leading to soaring fuel prices, the UK economy demonstrated unexpected resilience in the first half of the year. This resilience prompted a slight upward revision in full-year gross domestic product (GDP) growth to 1.1 per cent in 2026, up from 0.9 per cent projected earlier, with another 1.1 per cent predicted for 2027.
However, NIESR cautioned that the second half of 2026 will likely see a marked deceleration as high energy costs exert downward pressure on household incomes and geopolitical uncertainties hinder private business investment.
Mr Aikman remarked, “Andy Burnham faces a challenging inheritance—eroded real spending plans, the highest borrowing costs in the G7, new spending demands and cost of living pressures.” He added, “Debt is projected to stabilise, but there is no plan yet to bring it down. New commitments on defence or household support should be funded through taxation or savings elsewhere, not through further borrowing.”
Stephen Millard, deputy director for macroeconomics at NIESR, stated: “The UK economy proved to be surprisingly resilient in the first half of this year, but a slowdown is still to come. Even if peace is restored relatively quickly in the Middle East, inflation will still rise, and the new chancellor will need to make some difficult decisions regarding how to fund announcements such as VAT cuts on electricity and business rates for pubs, in addition to the £2 bus fare cap.”
The think tank predicts unemployment will modestly rise to a peak of 5.3 per cent in late 2026 before easing back to its natural rate of 5 per cent by late 2028. Living standards remain under pressure with NIESR projecting personal disposable income to grow by just 1 per cent in 2026 and only 0.1 per cent in 2027, as escalating energy prices take their toll.
As Mr Burnham pushes for measures to address youth unemployment, the NIESR warns that the crisis of young people not in education, employment or training (NEET) will persist, with over 1 million Britons aged 16–24 expected to remain in this status through 2030. Targeted local interventions in mental health and vocational education, rather than mere economic recovery, may be essential for meaningful progress.
These projections underscore the complex dilemmas facing the new leadership as they strive to balance fiscal responsibility with social needs.
