Healey’s headroom ‘could be wiped out by Iran war’
Chancellor John Healey’s fiscal headroom could be entirely wiped out by the impact of the war in Iran as economists said the Office for Budget Responsibility could offer a more pessimistic view on the UK economy.
A central fiscal forecast by analysts at EY suggests that the Chancellor’s buffer against a borrowing target has fallen to £11bn.
If the war in Iran drags on until the middle of next year, economists said that the headroom could be entirely wiped out as a further £18bn would be slashed from the fiscal forecast.
The different outcomes for public finances reflect the UK economy’s partial dependence on events outside of its own control.
EY analysis indicated that relatively small changes in forecasts could throw the Chancellor’s plans off course.
The £11.3bn estimate draws on expectations that the Strait of Hormuz, the trading route in the Gulf region that is critical for a fifth of global oil and gas supplies, re-open around the time of the Budget.
Under its adverse scenario where inflation hit six per cent and activity across the UK economy dramatically slowed down, Healey would stare down a deficit of £7bn in his current budget for 2029/2030. The fiscal rules state that day-to-day spending must be level or exceed by tax receipts in the third year of the OBR’s forecast window.
Healey’s Iran war problem
Pessimism across various markets has deepened in the last week following a rout in global bond markets and elevated energy prices, as shown by oil prices hovering around the $100 per barrel mark.
Alternatively, EY research also suggested that a fall in the unemployment rate could deliver higher earning growth, boosting tax receipts at an earlier point in time. This could deliver the Chancellor a rise in the headroom to about £40bn.
Mats Persson, EY’s macro and geostrategy analyst, said forecast judgment showed “how exposed the UK’s fiscal position has become to events well beyond its borders”.
“Energy market disruption originating in the Middle East has fed through into inflation, growth and borrowing costs, and UK gilt yields have reached their highest levels this century.
“The geopolitical backdrop may be outside the government’s control, but strengthening the supply side of the economy, such as by unlocking stronger productivity or creating the conditions for sustained business investment, would build capacity to help absorb external shocks.
“That is a longer-term agenda than any single budget but will ultimately determine how much room future chancellors have to work with.”