Burnham predicted to raise taxes for ‘fundamental’ cost of living support

Andy Burnham will struggle to deliver “fundamental” cost of living support without raising taxes, economists have warned, after a spike in government bond yields in recent weeks.

Higher than expected government borrowing in July has deepened problems for the UK’s public finances, narrowing the range of extra cost of living measures that could be adopted by the Prime Minister. 

Higher gilt yields and pressure on the state to soften the impact of the energy price shock mean Burnham and Chancellor John Healey may not be able to announce fresh spending packages without resetting existing budgets or raising taxes, several economists told City AM. 

Gilt yields over a 10-year horizon, the benchmark for government borrowing costs, hit a peak of over 5.1 per cent on Tuesday before dropping back slightly as concerns intensified that the Iran war could drag on. The Bank of England has warned it could hike interest rates as a result of continued trade disruption across the Gulf region in a bid to ease inflationary pressures, which could add to the £110bn debt interest load faced by the government.

ITEM Club’s Matt Swannell said that current market pricing on bonds would remove about £7bn of the £23.6bn fiscal headroom under the fiscal rules. 

While he said it would not “force additional fiscal tightening”, it could “limit Chancellor Healey’s room for manoeuvre”. 

“We think that the government will likely continue to follow its playbook since Andy Burnham became Prime Minister, with a focus on low-cost measures to address the cost of living, such as the announced cap on bus fares and upcoming suspension of VAT on electricity bills,” Swannell said. 

“Anything more fundamental than this would require other spending cuts or tax rises.”

Researchers at the Resolution Foundation, a left-leaning economics think tank, said the size of the fiscal headroom was likely to be even lower than £8bn altogether as the Iran war’s effects could still hit output growth. 

Burnham and Healey may turn to taxes

Borrowing has risen more sharply than expected in recent months in sharp contrast to inflation and growth statistics, which have come in more favourably than forecasts.

It puts Healey in a difficult position ahead of the Budget, with the government under pressure to raise defence spending to three per cent of GDP and provide support to families struggling with the cost of living. 

Capital Economics analysis suggested that there would be “little scope” to raise borrowing in the Budget later this year. A maximum of about £15bn could be accepted, according to the consultancy, though tax rises are likely.

Deputy chief UK economist Ruth Gregory noted that traders may be “more tolerant” if extra borrowing was used for investment and if it was cost-effective, although interference with the current fiscal rules could bring back “sensitivity” in the markets. 

A separate note by senior economist Ashley Webb warned that the UK was on track to post a deficit of above four per cent of GDP for the seventh year in a row. 

He warned weak performance in recent borrowing data was due to higher welfare payments about £2bn above levels last year.