Prime Minister Andy Burnham has been cautioned by the National Institute of Economic and Social Research (NIESR) regarding "very difficult trade-offs in the next autumn budget." This warning comes amid concerns that the Iran war will sustain high oil prices and inflation, presenting a "challenging inheritance" for the new prime minister.
The NIESR anticipates inflation will increase to 3.8% over the next seven months, averaging 3.1% in 2026 and peaking in February 2027. This persistent inflation is expected to put severe pressure on Mr Burnham's plans to revamp public services.
The thinktank has reduced its forecast for the Chancellor's spending headroom in the budget from over £7bn to approximately £3bn. It also suggests that Chancellor John Healey may need to secure an additional £24bn by the end of the decade to maintain services and real-terms welfare payments.
According to the NIESR, the UK economy is projected to grow at a slower pace this year and in 2027, with a downgrade to 1.1% growth for both years. This slowdown is attributed to higher energy prices and uncertainty from the ongoing conflict, potentially leading to £28bn in lost growth over two years compared to earlier forecasts.
David Aikman, the institute's director, stated that Mr Burnham faces a "challenging inheritance" with spending "eroded by inflation," coupled with high borrowing costs and new spending demands. He advised against increasing borrowing to fund new initiatives, suggesting that new commitments should be funded through taxation or savings elsewhere.