Chancellor John Healey is facing a £24bn real terms squeeze on the public purse, a consequence of higher inflation, a top think tank has warned. The National Institute of Economic and Social Research (Niesr) stated that this could force the government to increase taxes to fund its spending plans.
Niesr forecasts that price growth will peak at 3.8 per cent early next year. Inflation is then expected to return slowly to the Bank of England’s two per cent target by 2029, potentially impacting government spending plans by nearly four per cent by the end of the decade.
Professor Stephen Millard, Niesr's deputy director, indicated that the government would need to consider options such as sweeping tax reforms on property and reliefs, cutting the welfare bill, or breaking a manifesto commitment not to raise income tax. He emphasised that there is "clearly no scope for really increasing borrowing, so it is about choices."
Niesr director David Aikman urged the Chancellor to rapidly decrease the size of public debt, noting that UK borrowing costs are the highest among G7 nations. While Niesr revised its growth forecast slightly upwards to 1.1 per cent for both this year and 2027, it remains below the expected trend rate of around 1.2 per cent.
The Bank of England’s Monetary Policy Committee is scheduled to decide on interest rates on Thursday, alongside publishing new forecasts for inflation and growth. City analysts anticipate interest rates will be held, but will be monitoring updates on price growth and signals for future rate adjustments.