The ongoing conflict in Iran may lead the government to borrow an additional £30 billion this year, according to experts’ warnings. This anticipated strain on the economy sets the stage for a challenging period ahead for Chancellor Rachel Reeves and the Labour Party.
With mounting pressure on the government to address the impact of rising energy costs on households and businesses, recent data from the Office for National Statistics revealed that borrowing for the year ending in March totaled £132 billion, nearly £20 billion lower than the previous year. Despite this, borrowing in March alone reached £12.6 billion, surpassing expectations.
Elliott Jordan-Doak, a senior economist at Pantheon Macroeconomics, highlighted that any short-term benefits for Ms. Reeves are likely to fade, with more significant challenges expected in the following year. While increased petrol prices may generate higher VAT revenue for the Treasury, the energy shock from the conflict could dampen overall tax income.
Moreover, the anticipated economic repercussions may result in job losses and increased strain on the welfare budget. Michael Saunders, a former Bank of England rate-setter at Oxford Economics, cautioned that UK unemployment could surge by 150,000 in the current year, potentially impacting tax revenues.
As a consequence of the conflict, the government faces higher borrowing costs, with recent interest rates on UK government bonds hitting 5% for the first time in over a decade. The government’s debt interest payments in March totaled £3.2 billion, a decrease from the previous year, but inflationary pressures linked to the conflict are expected to drive up these costs.
Thomas Pugh, chief economist at RSM UK, projected that borrowing could exceed pre-conflict forecasts by £30 billion this year. He emphasized that as long as the increase in borrowing is temporary, it may not necessitate additional tax hikes.
However, Lindsay James, an investment strategist at Quilter, suggested that tax adjustments may be necessary to stabilize public finances amid the economic challenges. Chief Secretary to the Treasury, James Murray, defended the government’s actions, asserting that their strategies aim to reduce borrowing and secure energy independence.
Despite a previous increase in employer national insurance contributions boosting tax receipts, debt interest costs rose over the past year, reaching the second-highest annual level on record. Jordan-Doak at Pantheon Macroeconomics estimated that the government’s interest payments could exceed initial projections by £12 billion this year.
