Andy Burnham has been warned by economists that he will need to raise taxes or cut spending to pay for the pledges he made in his first week as prime minister, after a leading think tank concluded there is no room for further government borrowing. The National Institute for Economic and Social Research (NIESR) said inflation is likely to run well above Bank of England forecasts, adding to pressure on new chancellor John Healey as he prepares his first budget amid a challenging economic inheritance.

NIESR expects inflation to rise to 3.8 per cent next year, potentially forcing further interest rate rises, while economic growth is set to slow sharply from 0.4 per cent in the second quarter to just 0.1 per cent in the third. The warning follows roughly £2bn of new commitments from Mr Burnham, including a £2 bus fare cap, VAT cuts on energy bills and a 20 per cent reduction in pub business rates, alongside a £4.7bn defence funding shortfall and additional costs for social care reform and ending rough sleeping. NIESR director David Aikman said Mr Healey faces a 4 per cent real spending squeeze by the end of the decade, equivalent to about £24bn, and that Britain has inherited the highest borrowing costs in the G7 with no clear path to reducing debt.