How Iran war put Rachel Reeves Spring Statement out of date almost immediately
The UK Chancellor of the Exchequer would not want to make his spring statement amid a new threat to the world economy.
Because conflict in the Middle East will undoubtedly further complicate the UK’s economic future, as Rachel Reeves declares she has “the right economic plan for the country” in a “world that is becoming more uncertain”. The latest economic forecasts to which the Independent Office for Budget Responsibility (OBR) responds may already be out of date.
For example, it is too late to include in the OBR calculations any potential shocks to the global supply chain or the rise in energy prices that might result from US-Israeli attacks on Iran. But at a press conference following Reeves’ announcement, an OBR representative warned it could have a “very significant impact”. And even before the crisis emerged, the UK was facing an unusually high degree of uncertainty, they added.
But otherwise little changed from the autumn, the OBR report paints a mixed picture for the UK economy. Weak economic and employment growth are somewhat offset by expectations for low inflation and low interest rates.
The government’s future “headroom” (room for subsequent extra spending) is only slightly better than previously thought. The OBR says government debt will still be 95% of GDP by 2031. At the same press conference, he added that this high level of debt compared to other countries makes the UK more vulnerable to external risks.
But Reeves told MPs optimistically: “We beat forecasts last year […] we will beat them again,” he said, adding that stronger government finances would allow Britain to weather the storm and maintain current spending plans.
But the war could impact spending plans and the government’s hopes of coping with the high cost of living. Oil and gas prices are already rising and stock markets are falling. The OBR itself acknowledges that “significant risks, including conflicts in the Middle East” could significantly change its forecasts.
For example, gas prices have already risen after Qatar, a major supplier to the Middle East, closed its main refinery following Iranian attacks. Effectively closing the Strait of Hormuz would threaten the massive oil flows to major Asian economies such as China, Japan, Korea and Taiwan.
About the author
Steve Schifferes is Honorary Research Fellow at the Center for Urban Political Economy Research, City St George’s, University of London. This article is republished from The Conversation under a Creative Commons license. Read original article.
The UK government may have capped household gas prices, but a long-term rise in wholesale gas prices would increase inflation and make the Bank of England less likely to cut further interest rates.
While the UK buys relatively little gas from the Middle East, gas and oil prices are determined internationally. Europe is much more reliant on gas from this region, so disruption to supply could threaten both high inflation and low growth in Britain’s biggest export market.
This could also be an existential threat to Asia’s high-performing export economies that drive global growth.
A worldwide slowdown would have serious consequences for the UK economy, which is heavily dependent on foreign trade. US President Donald Trump’s discontent with Prime Minister Keir Starmer’s conditional support for his war could threaten the restoration of Britain’s favorable tariff deal.
A weaker UK economy, already growing at just over 1% a year, would have major consequences for government spending, tax revenues and the government’s room for action. This could mean both reduced tax revenues and increased borrowing; The cost of financing the government’s massive debt could rise, reversing recent declines.
All of this could make it difficult for the government to consider any electorally beneficial tax cuts ahead of the 2029 general election. It may even have to further extend the freeze on tax thresholds, squeezing workers’ pay packets.
These negative developments come as the government faces huge additional pressures on spending, which it later tried to postpone in the hope of a stronger balance sheet.
These include costly reforms to increase spending on students with special educational needs and disabilities and plans to reduce student debt. Other key long-term challenges include providing social care for an aging population, meeting ambitious housing targets (which are well behind schedule) and providing support to cash-strapped local authorities.
Rising geopolitical tensions could also force the government to accelerate plans to increase the UK’s defense spending from 2.5% to 3.5% of GDP, at a cost of around £40bn. That could mean tax increases or more cuts to other departments.
A short and decisive war could relieve all these pressures. But uncertainty itself could hinder investment and threaten the UK’s ability to solve the long-term productivity challenge that is key to raising living standards.
