Healey’s headroom ‘could wiped out by Iran war’

Chancellor John Healey's fiscal headroom could be entirely eroded by the repercussions of the Iran war, according to economists. The Office for Budget Responsibility (OBR) might provide a more pessimistic outlook on the UK economy, potentially reducing the Chancellor's buffer for borrowing to just £11 billion. If the conflict in Iran persists until mid-next year, the fiscal forecast could see a staggering £18 billion reduction, wiping out Healey's entire headroom.

The UK's economic reliance on external factors, particularly in the Middle East, amplifies this risk. A relatively minor shift in estimates could disrupt the Chancellor's plans. The £11.3 billion estimate assumes the Strait of Hormuz, a vital trading route in the Gulf region, reopens around the time of the Budget. In the worst-case scenario, where inflation reaches 6% and economic activity plummets, Healey would face a £7 billion deficit in his 2029/2030 budget.

The fiscal rules require that spending must either match or exceed tax receipts in the third year of the OBR's forecast period. Diminishing optimism across various markets, coupled with rising bond yields and soaring energy prices, has intensified since recent weeks. EY research suggests that a drop in unemployment could lead to higher earning growth, potentially increasing the Chancellor's headroom to approximately £40 billion.

However, the extent to which UK's fiscal position remains vulnerable to events beyond its borders remains a significant concern. EY's macro and geostrategy analyst, Mats Persson, highlighted the "exposure" of the UK's fiscal situation to external factors, emphasizing that geopolitical uncertainties can impact the economy. He stressed that bolstering the supply side of the economy, such as through enhanced productivity and encouraging business investment, would help mitigate external shocks—a long-term strategy rather than a short-term budgetary fix.