Labour's first Budget under Andy Burnham has failed to meet a basic credibility test and risks creating a £30 billion gap in the public finances, according to analysis by the National Institute of Economic Research. The NIESR found that Chancellor John Healey postponed difficult decisions on borrowing rather than addressing them, with the think tank warning that the government's approach threatens to increase the premium it pays to borrow money.
The Chancellor technically met targets to bring down borrowing over the coming years with £15 billion of headroom, but this figure has shrunk significantly from £24 billion in spring. Crucially, NIESR suggests this buffer was based on assumptions that the government would impose substantial spending cuts on departments in future years. The think tank indicated it was likely the government would step back from these plans during next year's spending review, which could wipe out the headroom entirely and cause borrowing targets to be missed by £30 billion.
The government faces substantial pressure on public finances. It is set to spend £144 billion in the current fiscal year alone on debt interest payments. Meanwhile, debt levels are expected to remain higher in 2031-32 than they are now, despite peaking in the next couple of years. Rising inflation is also eroding departmental budgets by around £7 billion annually unless they are topped up, and the government needs to find £11 billion to meet defence spending commitments.
NIESR director David Aikman said a plan lacking credibility increases borrowing costs, while deputy director Stephen Millard stated the Chancellor had postponed necessary choices on the deficit. Even modest spending restraint could have saved the government up to £2 billion annually in borrowing costs, the think tank calculated. Chief economist James Smith suggested the scale of cuts required means tax rises or significant welfare changes will be necessary to make the public finances add up, describing the trade-offs as approaching austerity-level spending.
For savers and borrowers in the UK, the analysis suggests government borrowing costs could rise if credibility concerns persist, potentially affecting mortgage rates and savings returns across the economy. The 2027 spending review will be a critical test of whether the government can deliver on its financial plans, NIESR said.