Government borrowing was less than expected in the last financial year – but Chancellor Rachel Reeves faces a “daunting” time ahead before of the economic impact of the Middle East conflict
The Iran war could force the government to borrow an extra £30billion this year, experts have warned.
A predicted shock to the economy from the war means a “daunting” year ahead, in a setback to Chancellor Rachel Reeves and Labour.
It comes as pressure grows on the government to dig deep to ease the pressure of higher power bills on low-income households and energy-hungry firms.
Figures from the Office for National Statistics showed the government borrowed £132billion in the year to March, nearly £20billion less than the year before.
It was also £700million below that forecast by watchdog the Office for Budget Responsibility (OBR). Borrowing in March alone was £12.6billion, the lowest figure for the month since 2022, but more than expected.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said: “The boost for Ms Reeves will likely prove temporary, with a more daunting 2026/27 ahead.”
While soaring pump prices have caused misery for motorists, it is expected to rake in higher VAT for the Treasury, which is also predicted to get a boost from windfall taxes on North Sea producers.
However, that risks being more than offset by an expected hit to the economy from the energy shock that could dent the take from other taxes.
At the same time, under-pressure firms are expected to shed jobs. Former Bank of England rate-setter Michael Saunders, now at advisory firm Oxford Economics, this week warned UK unemployment could jump by 150,000 this year. More people out of work risks pushing up the welfare budget even more, and hitting income tax receipts.
Another blow for the Treasury from the war has been higher government borrowing costs. The interest rate on UK government bonds recently touched 5% for the first time since 2008, before easing.
The government shelled out £3.2billion on debt interest payments in March, £1.3billion less than a year ago thanks to lower inflation at the start of the year. Higher inflation since March because of the Iran war means the bill is likely to rise.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, said: “Ultimately, this year’s borrowing could be £30billion higher than the pre-war OBR forecasts.”
He added that, as long as the jump in borrowing is temporary, it would not mean the need for Ms Reeves to announce more tax hikes.
But Lindsay James, investment strategist at wealth manager Quilter, said: “Tax is likely to feature prominently as the lever to pull to help keep the public finances on steady ground, and we have already seen the burden this places on growth.”
James Murray, Chief Secretary to the Treasury, insisted: “Our deficit is down £19.8billion because of our plan to cut borrowing. In a volatile world the decisions we are taking are the right ones to keep costs down, take back our energy security and cut borrowing and debt.”
Last April’s hike in employer national insurance contributions saw tax receipts jump 19% to £206.8billion – the highest since 2022/23.
Debt interest costs fell in March, but rose over the full year to £97.6billion, which was the second highest annual level on record.
Jordan-Doak at Pantheon Macroeconomics, estimated the government’s interest bill will be £12billion more this year than expected at the time of the spring statement.
