UK Government Faces Economic Squeeze Due to Persistent Inflation

The UK government faces a challenging economic situation due to persistent inflation, according to the National Institute of Economic and Social Research (Niesr). The think tank warns that there is no scope for extra borrowing to fund cost-of-living support measures and defence commitments. Niesr forecasts that Consumer Prices Index (CPI) inflation will peak at 3.8% in February 2027, higher than previously expected.

Stephen Millard, Niesr's deputy director for macroeconomics, suggests that the government should fund cost-of-living support measures through higher taxes or cuts in spending elsewhere. He recommends looking into reforming council tax to move towards a land value tax system and scrapping some VAT exemptions. If these measures are insufficient, he would consider breaking the manifesto promise and increasing income tax rates.

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