Prime Minister Andy Burnham announced a series of cost‑of‑living measures and pledged to increase defence spending after taking office last week. The National Institute of Economic and Social Research (Niesr) said the government has no scope to increase borrowing and must choose between raising taxes or cutting spending to meet its pledges.

Niesr warned that persistent inflation linked to the war in Iran will continue to pressure public finances. Its latest economic outlook projects inflation to peak at 3.8% in February 2027 before falling back to the Bank of England’s 2% target, and interest rates are not expected to be cut until 2028.

Stephen Millard, Niesr deputy director for macroeconomics, said the government will need to fund the pledges through higher taxes or spending reductions, citing the welfare bill, the triple lock on pensions and possible reforms to council tax or VAT exemptions.

Burnham has said he will uphold Labour’s manifesto promise not to raise income tax, VAT or national insurance for workers.

The Treasury responded that it will maintain fiscal discipline while investing in public services, describing fiscal discipline as the bedrock of economic stability and national security.

Niesr concluded that without additional revenue or spending cuts, the national debt ratio will continue to rise, leaving the government’s ability to meet its commitments uncertain.