Think Tank Warns No Room for Extra Borrowing as Inflation Peaks

A think tank has warned that there is no scope for extra Government borrowing to fund new cost-of-living and defence commitments, including a promise to cut VAT from electricity bills in October. The National Institute of Economic and Social Research (Niesr) forecasts that Consumer Prices Index (CPI) inflation will rise to 3.8% in February 2027, taking longer to slow to the 2% target level than previously expected.

Niesr's deputy director for macroeconomics, Stephen Millard, said that cost-of-living support measures are not the answer and that it is the Bank of England's job to hit the inflation target. He suggested that the Government should fund new commitments through higher taxes or cuts in spending elsewhere.

Millard pointed to potentially reforming council tax to move towards a land value tax system, scrapping some VAT exemptions, and even breaking Labour's manifesto promise by increasing income tax rates as possible measures to raise funds. He also mentioned the welfare bill and the triple lock on pensions as areas for cost savings.

The UK economy is expected to rise by 1.1% this year, higher than previously projected due to stronger-than-expected data. However, Niesr's analysis estimates that the Middle East energy shock has resulted in a £15 billion loss of GDP.