Escalation in the Middle East conflict might significantly affect government borrowing, potentially eliminating most of the fiscal buffer established by Chancellor Rachel Reeves in the recent budget. According to the Resolution Foundation, a severe yet realistic escalation could boost annual government borrowing by £16 billion by 2029-30. Reeves created a £21.7 billion fiscal margin in the autumn budget to ensure expenditures align with tax income. The conflict with Iran has strained living standards, with gasoline prices jumping 20% and energy costs expected to increase by up to 20% in July, raising concerns about broader economic effects on the UK. Official data released today indicates inflation increased to 3.3% last month from 3% in February, fueled by elevated prices for petrol, diesel, and air travel. The think tank recommends that any energy bill assistance from the chancellor should be focused and short-term, as broad unfunded aid could elevate interest rates. Their analysis shows that borrowing £20 billion for extra household support might raise mortgage rates by 0.4 percentage points. Simon Pittaway, a senior economist at the Resolution Foundation, noted that the ongoing Middle East conflict will likely reduce prosperity for everyone. Fuel costs have already risen, and energy bills are set to follow in July. This situation will also strain public finances, with a worsening conflict possibly causing a £16 billion shortfall. He praised the chancellor for creating a sufficient buffer in the previous budget to handle such a blow, and suggested that targeted, temporary energy support would help maintain fiscal rules during this economic challenge. Foreign Secretary Yvette Cooper has reiterated warnings that the Strait of Hormuz closure is harming the global economy, as efforts continue to protect this vital shipping lane. The Resolution Foundation observed that the conflict’s effects have been milder so far compared to Russia’s invasion of Ukraine, where gas prices spiked 300p per therm versus a peak of 78p in March. However, the UK economy seems more susceptible due to its heavy reliance on gas for 62% of household energy and greater sensitivity of interest rates to international events. Although the UK’s GDP is half as energy-dependent as the global average, both the IMF and OECD reduced UK growth forecasts by 0.5 percentage points this year, the largest downgrade among G7 nations. The think tank estimates that for a typical first-time homebuyer ending a fixed-rate mortgage, costs have risen by about £100 since the conflict began. Government borrowing data for the past financial year will be released by the Office for National Statistics on Thursday. A spokesperson from HM Treasury stated that these projections are speculative and the conflict’s impacts remain uncertain, as acknowledged by the report’s authors. They emphasized the importance of enhancing UK resilience through better energy security and stronger public finances, noting that prior government decisions positioned the country well. Measures are underway to strengthen energy security, support domestic industry, and provide targeted household aid. European stock markets showed modest gains, except for London’s FTSE 100, which declined 0.1%. The index dropped 13 points to 10,484 early in the session. Germany’s Dax increased nearly 0.5%, while France’s CAC, Italy’s FTSE MIB, and Spain’s Ibex each gained 0.2%. Brent crude oil fell 0.5% to $98.03 per barrel. Donald Trump extended the US-Iran ceasefire unilaterally, but the US maintains its blockade of Iranian ports, and the Strait of Hormuz stays closed. Reports indicate a container ship near Oman was targeted by an Islamic Revolutionary Guard Corps vessel, per the United Kingdom Maritime Trade Operations. Condom prices are also increasing. The leading global producer, Malaysia’s Karex, intends to hike prices by 20% to 30%, or more if supply chain issues from the Iran conflict persist, according to its CEO. The company is experiencing higher demand for condoms as elevated shipping costs and delays have depleted customer inventories.
