The paper says that 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:
The warning comes amid questions over how Mr Burnham plans to pay for giveaways he announced last week, including a £2 bus fare cap, cutting VAT from energy bills and slashing pub business rates by 20 per cent – all amounting to around £2bn.
At a briefing in Westminster, NIESR director David Aikman said: “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 see the BoE forced to hike interest rates again to push it down to the government’s 2 per cent target.
In further bad news, economic growth, which was 0.6 per cent for the first quarter of the financial year and 0.4 per cent for the second, is set 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 around £2bn of new commitments in his first week and alongside widespread speculation that Mr Healey, who quit as defence secretary over a £13bn shortfall in defence spending, wants to find that cash through selling war bonds – an option his predecessor Ms Reeves warned was “just another form of borrowing”.
On top of that, the Treasury needs to find another £4.7bn to fill a black hole in the current defence spending plans, as well as cash to fund Mr Burnham’s reforms to social care and plans to end rough sleeping.
Mr Aikman told the briefing that more borrowing risks the UK “suffering an economic shock” because of uncertainty created by the international environment, including the ongoing war in Ukraine and Donald Trump’s war with Iran.
The NIESR warned that Mr Healey faces a 4 per cent real spending squeeze by the end of the decade – equating to approximately £24bn in 2023 prices – because of higher and more persistent inflation, which will create very difficult trade-offs in the autumn Budget.
The annual NIESR economic outlook underscored that the government has inherited the highest borrowing costs in the G7, heavily backloaded toward an election year, and eroding real purchasing power across public spending.
With public debt stabilising at a high level, but no path to bringing it down, NIESR stressed that any new commitments on defence funding and improving living standards must be funded through taxation or spending reallocations rather than additional borrowing.
Theresa May famously said that there is no magic money tree, can Andy Burnham prove her wrong?
Labour have tied themselves in a straightjacket by staying with their 'fiscal rules' policy. EVERYTHING costs money and by not considering tax rises will fail.
ReplyDeleteThere's nothing magic about the Government creating money. That's where it comes from in the first place.
ReplyDeleteThey can create as much as they like and it will nearly all come back in tax sooner or later. Where else can it go? There'll only be a tiny amount that is permanently lost or burnt.
So it won't probably won't affect the deficit but it will create higher inflation if they overdo it. The tricky balance is to produce growth without creating inflation.