Andy Burnham has warned Britain faces a “challenging” Budget next month as inflation climbed to 3.1 per cent, piling fresh pressure on a Labour Government already wrestling with rising borrowing costs, a swelling welfare bill and concerns over Britain’s attractiveness to businesses and wealthy taxpayers.
The Prime Minister sought to pin much of the latest inflationary pressure on the war in Iran and turmoil in the Middle East, after sharply higher oil prices pushed up the cost of petrol and diesel.
There is no question that the international energy shock is playing a role. Official figures released on Wednesday showed Consumer Prices Index inflation increased from 2.9 per cent in July to 3.1 per cent in August, its highest level for five months.
Motor fuels were the biggest driver, rising by 23 per cent compared with a year earlier, while petrol increased by 9.1p a litre during August to an average 161.3p and diesel jumped by 14.2p to 181.8p. Air fares also rose by 6.2 per cent between July and August.
But the deteriorating economic picture facing Labour cannot simply be explained by events in Iran.
The Government is also confronting the consequences of domestic decisions over taxation, spending and welfare, at the same time as businesses have been absorbing substantially higher employment taxes.
Labour increased the rate of employers’ National Insurance from 13.8 per cent to 15 per cent in April 2025 and slashed the threshold at which employers begin paying it from £9,100 to £5,000. The Government simultaneously increased the Employment Allowance to protect many smaller employers, but the changes nevertheless increased the tax burden on employing many workers.
Capital Gains Tax rates were also increased, while Business Asset Disposal Relief rose to 18 per cent from April this year.
Meanwhile, concerns about Britain’s ability to retain some of its biggest taxpayers have intensified following the decision by billionaire hedge fund manager Chris Rokos to move his tax residence to Greece.
Rokos reportedly paid an extraordinary £330 million in UK tax last year, making him Britain’s third-biggest individual taxpayer, according to The Sunday Times Tax List. Reports have linked his departure to concerns over Britain’s tax regime and previous proposals for an exit tax, although neither Rokos nor the Treasury has publicly confirmed his precise reasons for leaving.
To put £330 million into perspective, it is roughly enough to cover the salaries of thousands of police officers for a year, although exact comparisons depend on whether salary alone or the full cost of employing an officer is used.
And Rokos is not an isolated case. Other prominent wealthy residents have moved overseas amid changes to the tax treatment of non-doms and overseas assets, fuelling a growing argument over whether squeezing Britain’s richest residents ultimately raises more money for the Treasury or encourages highly mobile taxpayers and their capital to leave. Supporters of higher taxes on wealth dispute claims of a widespread tax-driven exodus and argue that those with the greatest resources should contribute more.
At the same time, Labour remains under intense pressure over the size of the welfare state.
Mr Burnham last week rejected Conservative proposals to cut £4 billion from housing benefits to help fund higher defence spending, describing the approach as too crude and warning of the consequences for homelessness. He has said savings should instead come through wider welfare reform.
The political difficulty is that welfare spending is continuing to rise while the Government’s room for manoeuvre becomes increasingly constrained.
That leaves the Chancellor, John Healey, facing an uncomfortable equation ahead of October’s Budget, finding enough money to meet Labour’s spending commitments while servicing more expensive government debt, dealing with international energy shocks and avoiding tax increases that could further weaken investment and business confidence.
According to The Telegraph, Oxford Economics estimates the Chancellor may have to find around £11 billion merely to restore the fiscal headroom previously available to him after government borrowing costs surged. Thirty-year gilt yields climbed above 5.9 per cent this month, while the benchmark 10-year yield moved above 5.4 per cent, levels not seen for many years.
Speaking during a visit to McLaren’s factory in Woking on Wednesday, Mr Burnham acknowledged that inflation was a “concern”, but insisted there remained “resilience across the board” in the British economy.
He said the international situation meant the Budget would be difficult.
“It is going to be challenging, because the picture around the world is challenging, particularly the situation in the Middle East, and we will look carefully at all those things,” the Prime Minister said.
“We won’t take risks with people’s living standards or with the economy as a whole, so we will take it all into account.”
Mr Burnham said the Government’s decision to hold an earlier Budget would allow ministers to take action to help households while exercising what he called the “highest degree of prudence” over the economy.
The Government has pointed to measures including removing VAT from electricity bills, the £2 bus fare cap and lower rates for pubs, social clubs and live music venues as evidence it is attempting to ease pressure on households and businesses.
There was also some reassurance buried within Wednesday’s figures. Food inflation remained relatively subdued at 1.3 per cent and services inflation held at 3.4 per cent, while economists said there was so far limited evidence that the latest energy shock was spreading throughout the domestic economy.
But households could face further pain.
The Ofgem energy price cap is due to rise by 4 per cent from October 1, while Goldman Sachs now expects headline inflation to peak at 3.9 per cent early next year as higher energy costs work their way through the economy.
The Bank of England must now decide how much of the inflation surge is a temporary imported energy shock and how much risks becoming embedded in the wider economy. Rates currently stand at 3.75 per cent, with the Bank due to announce its latest decision on Thursday.
For Labour, however, the problem is becoming increasingly difficult to separate into neat boxes marked “international” and “domestic”.
War in the Middle East may explain the sudden jump in fuel prices, but decisions over taxation, welfare, spending and the treatment of businesses and investors are made in Westminster.
And as Mr Burnham prepares the country for a “challenging” Budget, the central political question will be how much more Labour intends to raise in tax, how seriously it is prepared to tackle expenditure, and whether Britain’s businesses and taxpayers will be asked once again to pick up the bill.
