29th July 2026
Andy Burnham's Government is facing an uncomfortable financial calculation: the new Prime Minister wants to reduce household costs and improve public services at exactly the moment when higher energy prices are making both objectives more expensive.
The scale of the problem has now become clearer.
The National Institute of Economic and Social Research says the energy shock caused by the conflict involving Iran has eroded most of the Government's previous fiscal headroom.
It estimates that the Government's spending squeeze could amount to around £24 billion in real terms by the end of the decade.
That doesn't necessarily mean the Government has to find a cheque for £24 billion tomorrow.
It means that higher inflation and weaker economic growth are reducing the amount of money available to maintain existing public services and welfare commitments in real terms.
And that makes the autumn Budget considerably more difficult.
The Government started with ambitious plans
Burnham has already made a series of commitments.
They include measures designed to reduce the cost of living, including the planned removal of VAT from household electricity bills.
There are also ambitions to improve adult social care, support young people who are not in education, employment or training, and increase spending in other areas.
Those policies may have considerable social benefits.
But they all have something in common.
They cost money.
And the Treasury has to find that money while dealing with a difficult economic environment.
The oil shock has changed the calculation
When energy prices were falling, the Government could hope that inflation would continue moving towards the Bank of England's 2% target.
That would have helped in several ways.
Lower inflation would reduce some government spending pressures.
It would also reduce the interest costs associated with inflation-linked government debt.
And it could make it easier for the Bank of England to reduce interest rates.
But the recent rise in oil prices has changed the picture.
NIESR now expects inflation to average 3.1% in 2026 and reach 3.8% in February 2027, with inflation not returning to the Bank's 2% target until early 2029.
That makes the Government's financial position much more difficult.
Higher inflation can squeeze public services
This is sometimes misunderstood.
If the Government's budget for a public service remains unchanged while wages, energy, fuel and other costs increase, the service effectively has less spending power.
A hospital may receive the same number of pounds but find that those pounds buy less.
A council may have the same budget but face higher wage, transport and energy costs.
A social-care provider may face higher staffing costs.
So inflation can create a real-terms spending cut even when the Government has not formally cut the cash budget.
That is the source of much of the £24 billion pressure identified by NIESR.
Then there is government borrowing
The obvious answer would be to borrow more.
But that is where the situation becomes more complicated.
UK public-sector net debt was approximately £2.99 trillion at the end of June, equivalent to around 94.9% of GDP.
The Government therefore cannot assume that borrowing can simply solve every problem.
Higher borrowing can eventually mean higher interest costs.
And if investors become concerned about the Government's finances, the cost of borrowing can rise further.
That can create a vicious circle.
More borrowing → higher debt → higher interest costs → greater pressure on future budgets.
Yet there is some good news
The public finances aren't deteriorating in every respect.
Public-sector borrowing in June was £16 billion, down by £7.9 billion, or 33%, from the same month a year earlier.
Borrowing for the financial year to June was £57.6 billion, £3.7 billion lower than the equivalent period last year.
That provides some welcome breathing space.
But there is a catch.
Borrowing during the first quarter of the financial year was still the 10th highest April-to-June figure since comparable records began in 1993.
So the improvement is real, but it doesn't mean the public finances are suddenly comfortable.
What does this mean for tax?
This is where the debate becomes particularly interesting.
The Government could raise taxes.
It could reduce tax reliefs.
It could allow fiscal drag to increase revenue as wages rise while tax thresholds remain frozen.
It could also look for ways of improving tax compliance and reducing avoidance.
NIESR has suggested that new Government commitments should be funded through taxation or savings elsewhere rather than additional borrowing.
That puts the Personal Allowance debate we have recently considered into a much wider context.
If Burnham wants to increase the tax-free allowance, he would need to explain how the lost revenue would be replaced.
Could the Government cut spending instead?
In theory, yes.
But that may be even harder politically.
The Government is already under pressure over:
NHS waiting lists;
social care;
local government finances;
education;
defence;
housing;
transport;
benefits.
There is a fundamental difference between promising to reduce waste and actually reducing expenditure.
A genuine £1 billion saving means £1 billion less being spent somewhere.
The Treasury therefore faces a difficult choice between increasing taxes, reducing spending or accepting more borrowing.
Growth could provide part of the answer
The best solution would be stronger economic growth.
A larger economy generates more tax revenue without necessarily requiring higher tax rates.
It can also make existing government debt easier to manage because the economy producing the income is larger.
But relying on growth is risky.
NIESR has increased its 2026 growth forecast slightly to 1.1%, but expects a slowdown ahead.
That isn't the sort of growth rate that gives a Chancellor enormous room for manoeuvre.
The £24 billion figure is therefore important
The £24 billion isn't simply another government spending commitment.
It represents the scale of the real-terms squeeze that higher inflation could create.
That is particularly important because the Government has already made commitments based on a different economic environment.
The economic outlook has changed.
Oil prices are higher.
Inflation is likely to remain above target for longer.
Interest rates may not fall as quickly as previously hoped.
And government debt remains very high.
The Personal Allowance debate suddenly looks more difficult
A higher Personal Allowance could help millions of households.
Increasing it from £12,570 to £15,000, for example, could potentially give a basic-rate taxpayer up to about £486 a year of additional tax relief.
But the Treasury would have to find the money.
And that is the problem facing Burnham.
The Government cannot simultaneously promise:
lower taxes + cheaper household bills + better public services + more defence spending + higher social spending
without explaining how the arithmetic works.
At some point, the numbers have to balance.
There may be difficult choices ahead
The autumn Budget could therefore become a defining moment for the new Government.
It may have to choose between:
higher taxes;
reduced spending elsewhere;
slower implementation of new programmes;
greater borrowing;
or some combination of all four.
And the longer inflation remains high, the harder those choices become.
The Government's biggest problem may be expectations
The public has been promised improvements in several areas.
People want cheaper bills.
Businesses want lower costs.
The NHS needs more resources.
Local government wants more money.
Defence spending is under pressure.
Families want better living standards.
But the Treasury cannot satisfy every demand simultaneously.
The new Government has inherited a public finances problem that has been made more difficult by the energy shock.
NIESR says the economy has proved surprisingly resilient, but warns that a slowdown is still to come.
That may be the central economic challenge for Burnham.
He has to deliver more while the economy is giving him less room to do it.
And that is why the £24 billion figure matters.
It turns the autumn Budget from a political wish list into a financial balancing act.
The Government can choose where the pressure falls.
But it cannot make the pressure disappear.