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UK warns of tighter budget as Iran war keeps oil and inflation high
A leading thinktank forecast inflation at 3.8% over the next seven months and said the government may need an extra £24bn by the end of the decade to sustain services and real-terms welfare.
The Guardian Business reports that the UK faces “very difficult trade-offs” in its next autumn budget if the Iran war keeps oil prices and inflation elevated. The National Institute of Economic and Social Research (NIESR) said new Prime Minister Andy Burnham inherits persistently higher prices that will put severe pressure on plans to revamp public services. The thinktank linked the outlook to disruptions in the Strait of Hormuz, saying the waterway has been all but closed since March and oil briefly returned above $100 a barrel. It expects inflation to rise to 3.8% over the next seven months, tightening the constraints on the Chancellor, John Healey, who it said would need to find an extra £24bn by the end of the decade to maintain services and real-terms welfare payments.
NIESR also cut its forecast for the budget’s spending headroom from just over £7bn to nearer £3bn. The government’s independent forecaster, the Office for Budget Responsibility, estimated in March that the Treasury had about £22bn of spare capacity above existing spending commitments.
The NIESR said higher energy prices and spillover effects from uncertainty would slow UK growth this year and in 2027, downgrading growth to 1.1% this year and the same slow pace next year. It estimated that would leave the UK with £28bn in lost growth over two years versus January forecasts, adding that borrowing costs are the highest in the G7, with David Aikman warning against easing pressure by raising borrowing further.