# Loose lips still sinking ships

_A year after its £51bn black hole quietly evaporated, the NIESR is back with a £24bn sequel and an inflation forecast to match. I think it will be just as wrong – and just as damaging._

Neil Woodford · 30 July 2026 · 8 min read

![Ship aground on some rocks](https://cdn.sanity.io/images/v3acfbvo/production/6751008a5e044df2a62f1f51691d914dd3630fd0-2866x1912.jpg?w=1600&fit=max&auto=format)

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Just about a year ago I wrote a note entitled ['Loose lips sink ships'](https://www.noisecancelling.co/read/loose-lips-sink-ships), which was focused on a UK economic outlook paper authored by the NIESR which, by the by, happens to be the UK's oldest independent economic research house. Interestingly, and I didn't know this until today, it was founded in 1938 by a group of 'reformers' including John Maynard Keynes. The piece was a commentary on the damage done to the economy by forecasters and commentators, including the NIESR, who are consistently and relentlessly negative on the UK's economic outlook but also wrong, and in some cases spectacularly wrong.

Regular readers may well remember that about this time a year ago the economic consensus was obsessed with the NIESR's forecast of a £51bn black hole in the nation's finances, which it said would have to be filled by a massive increase in tax in Rachel Reeves's second budget. The prediction was based on a very gloomy outlook for the UK economy combined with dire forecasts for productivity growth. Without rehashing all the arguments, I argued at the time that the NIESR was completely wrong about the black hole, and although the Chancellor did increase taxes (in part by extending the freezing of allowances), they were essentially deferred until later in the parliament and their scale was not in the same postcode as the £50bn that the NIESR was recommending.

_[Embedded media](https://niesr.ac.uk/blog/where-did-fiscal-black-hole-go)_

In fact, later in the year, in a paper published in December entitled 'Where did the Fiscal Black Hole Go?', which by the way received virtually no attention, the NIESR effectively admitted that instead of the £51bn hole it had forecast, the OBR numbers showed the Chancellor was set to meet her fiscal rules with £4.2bn of headroom, which the NIESR went on to say was 'far better than most expected' – embarrassingly, it failed to add that it was in fact far better than it had forecast.

**£4.2bn** — The actual OBR headroom, versus the £51bn hole the NIESR forecast

As I have said many times, forecasting is a tough gig and by definition forecasters will get things wrong, but this was a particularly egregious example of the consensual nonsense that appears to have become a uniquely British economic forecasting disease – and all the more so because it led to a huge amount of speculation ahead of the budget about how much taxes would have to increase, which then naturally had a negative impact on business and consumer confidence throughout the autumn.

_[Embedded media](https://www.cityam.com/healey-faces-24bn-spending-squeeze-as-inflation-puts-tax-rises-in-play/)_

I was reminded of this shambles today when I read that the NIESR had let it be known, in a new update on the economy, that the government will have to raise taxes or cut spending to meet its pledges on defence and the recent cost-of-living initiatives (VAT on electricity bills, bus fares and some business rate relief for pubs and clubs, but not restaurants, for some reason). Whilst in principle I agree with this statement, the next bit is where the NIESR once again goes a bit mad. It suggests that taxes will have to rise or spending reduce, or a combination of these two, by an extra £24bn by the end of the decade, because it now expects inflation to rise to 3.8% over the next seven months and then to remain persistently higher than it had previously forecast, not returning to the Bank of England's 2% target until 2029. In amongst this latest dose of gloom, the NIESR has actually upgraded its growth forecast for this year to 1.1%, which is still too low, from a barely believable 0.9%, but maintains the gloom with a forecast for next year of 1.1%, which I am also confident is wrong.

So, in summary, the NIESR has increased its inflation forecast and its growth forecast but concluded that the Chancellor has a new £24bn hole to fill. It goes on to suggest that closing this gap via spending restraint would not be 'politically viable', despite the fact that spending under this government has increased by £129.2bn in two years – leaving, of course, only one option, given that borrowing is maxed out.

Just as an aside: in researching the data for this piece, I was surprised to see that this increase in government spending did not include any increase in debt interest payments. In fact, they have fallen over the last two years by £6bn, as a result of lower inflation and its impact on index-linked coupons. Given what's happened to UK government bond yields over the last two years, I was quite surprised by that number, but it does underline the fact that the spending increases under this government are the direct product of its choices and not the product of externalities. _(Neil in the margin: A chunk of the national debt is index-linked gilts, whose interest payments move with inflation. When inflation falls, so does the interest bill on those bonds – which is how debt interest can fall even while bond yields rise.)_

Returning to the NIESR's latest doom-laden prognostications: in the commentary accompanying the latest forecast update, it suggests that the 'energy price shock' will push inflation up to 3.8% in early 2027, a level from which it will only gradually fall, and that it will not reach the Bank of England's 2% target until 2029. Interestingly, this forecast is predicated on the oil price falling to $70 by the year end and to $62 by the end of 2027. I can only imagine that once again this organisation is invoking the mysterious second-round effects to drive what I consider is its ridiculously high inflation forecast, because these oil price forecasts look reasonable to me. Unfortunately, the NIESR's gloom doesn't end here, because it has also mapped out other scenarios, rather like the Bank of England did back in April, all of which are more bearish, and the most extreme of which sees inflation increasing to 7.5% by April next year. _(Neil in the margin: The theory that an initial price shock – oil, say – triggers a second wave of inflation as workers demand higher wages and firms raise prices to compensate. Economic models are often programmed to assume it; the question is whether the data actually shows it.)_

I disagree with this outlook. Of course, the conflict in the Persian Gulf has the capacity to deteriorate and, in a situation where the conflict returns to the intensity seen back in April and May, I suspect there would be more upward pressure on the oil price. Having said that, given the existing mitigations and those yet to come through, I still believe we have passed the point of maximum concern in the oil market. However, where I disagree most with this new doom-laden outlook is how the NIESR translates a $70 oil price at year end into 3.8% inflation. Based on what I see, and the much more reliable analysis of someone who I consider to be [the best UK economist by some distance](https://www.noisecancelling.co/read/uk-economy-briefing-july-2026), UK inflation peaks somewhere close to 3% in the next three months and then [falls to close to the MPC's target by the middle of next year](https://www.noisecancelling.co/read/why-i-can-see-uk-interest-rates-below-3-next-year).

As for this particular 'energy price shock', I thought that it might be a good idea to put some context around the language. My view is that it is an extremely odd energy price shock that is coincident with:

- CPI inflation at 2.6% and core inflation at 2.6% in June, some four months after the war started. That's lower than in the EU and in the US.

- Falling inflation in 2026 – CPI started the year at 3.4% and is now 0.8% lower at 2.6%.

- Food prices have fallen in 2026 in absolute terms up to the end of June.

- Food price inflation in June YOY was at 1.7%. It is supposed to be particularly susceptible to higher transport costs.

- According to the British Retail Consortium, annual shop price inflation fell in July to 0.9% from 1.2% in June. The commentary accompanying this data release suggested that 'retailers competed hard to limit price rises with a wave of summer promotions across food and other goods'. It also added that non-food inflation slowed to 0.2% from 0.6% in June, despite higher electrical product prices following increases in semiconductor prices.

- The most recent data on private-sector pay settlements shows the annual increase at 2.7%. That's the lowest in six years.

> Academic economic model theory smashes into pragmatism, common sense and evidence.

Once again, I suspect we are at the point where academic economic model theory smashes into pragmatism, common sense and evidence. Whilst the NIESR, I am confident, is getting answers from its very sophisticated UK economic model, which has been programmed to assume multiple second-round effects from an oil price shock, in the real world those effects are totally absent. What is abundantly clear, as I have been saying since this war started, is that there would be no second-round effects in the labour market nor in the broader economy, and so it appears to be.

So the NIESR has again attracted a lot of attention from the media for its latest dystopian vision of the future, not because of its forecasting track record but because it's part of the economic establishment. Not one journalist, as far as I can see, has covered the shambles of its £51bn black hole myth of last year, but many have again lapped up its latest doom-laden prognostications, which I predict will be as wrong as they were twelve months ago and which will once again undermine confidence in the economy.

## A footnote to this piece

Whilst I am confident that the NIESR's economic forecasts are wrong, what is clear is that the new PM is keen to get busy doing stuff. Whilst I am inclined to be critical of much of what Mr Burnham has said so far, there are a number of things he appears to want to tackle with which I agree. A good example of this would be what he appears to want to do with education and youth training: reinstating school careers advice, linking it to local labour markets, and providing more technical and vocational training. If that means fewer young people ending up at dubious universities charging ludicrous fees for worthless degrees, all the better.

_What I would tell Mr Burnham:_ [Won’t get fooled again](https://www.noisecancelling.co/read/wont-get-fooled-again) — A new Prime Minister, the same script. If Mr Burnham asked me how to get the UK growing again, here is what I would tell him – keeping everything simple.

There is one but, though. Whatever he tries to do will require funding, and therein lies his biggest problem. His predecessor has maxed out borrowing, and spending cuts are a Rubicon his backbenchers will apparently not cross. Massive tax increases have handicapped growth in the economy, and Mr Burnham needs growth more than anything else, because it, and only it, will generate the fiscal headroom he needs for the shopping list of initiatives he is so keen to get on with.

How does he solve for this? Unfortunately, I suspect he won't, because he will resort to the reflex all Labour governments always do, which is to take the apparently easy but damaging option of increasing tax again. This time, I suspect he will align CGT with income tax and probably also introduce the recently discussed death tax – a 10% levy on all estates – which might raise something like £15bn but would take the total tax on estates above £325,000 to an astonishing 50% (before some reliefs for passing homes to direct descendants).

If I were advising Mr Burnham, I would be suggesting he stiffens his resolve and confronts his backbenchers rather than handicap the economy even more. I suspect that, for all their bluster, they will not bring him down, which would of course trigger a general election that none of them would relish right now. Bravery over short-term convenience would be my message – and finally, I might just show him this chart, which should really make him stop and think.

![Taxes on income and wealth: a 70-year high](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-uk-income-wealth-taxes-70-year-high-c0e3c901d9d3-light.png)

_The last time the state took this much of the nation's income in direct taxes, the top rate of income tax was 83% – 98% on investment income. Today's record has been reached with a 45% top rate: frozen thresholds and a broadened base have done quietly what punitive rates once did loudly._