Ruth Gregory, deputy chief UK economist at Capital Economics, said the full impact from the energy price shock caused by the conflict “is still to come”.
Since the outbreak of the US-Israeli war with Iran, energy prices have surged due to the effective closure of the Strait of Hormuz – a key waterway with usually carries about 20% of the world’s oil and liquid natural gas supplies.
This has already pushed up petrol and diesel costs, and has started to increase the rate of inflation – the pace at which prices rise.
Last week, the International Monetary Fund (IMF) predicted the energy shock from the Iran war would hit the UK the hardest of the world’s advanced economies, and cut its estimate for UK growth this year to 0.8% from its previous prediction of 1.3%.
While the government might gain extra revenues from taxes on petrol and North Sea oil and gas, weaker economic growth is likely to lead to a slower increase in overall revenues from taxes.
In addition, the government has been facing higher borrowing costs since the start of the Iran war, and there is the possibility of future support for household energy bills, although Chancellor Rachel Reeves has said this would target those on lower incomes.
Capital Economics’ Gregory said: “We continue to think that the combination of some targeted energy price support, totalling about £20bn, high interest rates and the weakening economy will mean borrowing rises from £132bn in 2025/26 to about £145bn this year.”
Elliott Jordan-Doak, senior UK economist at Pantheon Economics, said the chancellor was facing “a more daunting 2026/27 ahead”.
He estimated that government is facing an increase of about £12bn in interest payments this year, and “any further fiscal support for households or businesses will require additional borrowing”.
Last week, the International Monetary Fund (IMF) predicted the energy shock from the Iran war would hit the UK the hardest of the world’s advanced economies.
The ONS said borrowing in the month of March was £12.6bn, which was higher than analysts had been expecting. However, the figure was £1.4bn less than a year earlier, and the lowest March borrowing since 2022.