Rachel Reeves braces for 'severe' hit to economy as UK faces £16bn borrowing cost SURGE amid US-Iran war

Patrick O'Donnell
Tue, 21 Apr 2026 23:01:02 +0000

Chancellor Rachel Reeves faces a borrowing disaster as three-quarters of the Treasury's fiscal buffer could be wiped out due to the US-Iran war, new analysis suggests.

The Resolution Foundation is sounding the alarm that the UK is at risk of a "severe but plausible scenario", where if the Middle East conflict intensifies, Government borrowing would surge by £16billion annually by 2029-30.

The Chancellor secured £21.7billion in fiscal headroom during the autumn budget, meaning her fiscal rule requiring spending to be covered by tax revenues would technically survive such a shock.

Simon Pittaway, senior economist at the Resolution Foundation, said: "No-one knows which direction the current conflict in the Middle East will take but we do know that it will make us all poorer."

He added: "A deterioration in the conflict that sustains some of the worst hits to the economy could deal a £16billion hit to the public finances."

The conflict has already taken a toll on household finances, with petrol prices climbing 20 per cent and energy bills expected to increase by as much as 20 per cent when the July price cap takes effect.

Mr Pittaway warned: "The cost of filling up the car has already increased and, from July, so too will energy bills."

First-time buyers nearing the end of their fixed-rate mortgage deals have seen monthly costs rise by approximately £100 since hostilities commenced.

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The Resolution Foundation cautioned that any Government support for energy bills must remain targeted and time-limited, warning that unfunded universal assistance could backfire.

Their analysis showed that borrowing £20billion for additional household support would likely push mortgage rates up by a further 0.4 percentage points.

Despite Britain's economy being half as energy-intensive as the global average, the UK has suffered the steepest growth downgrade among G7 nations this year.

Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development cut their UK growth forecasts by 0.5 percentage point, which is the largest reduction applied to any advanced economy in the group.

The Resolution Foundation attributed this vulnerability to Britain's heavy reliance on gas, which makes up 62 per cent of household energy consumption, combined with UK interest rates being particularly sensitive to global market movements.

Foreign Secretary Yvette Cooper has warned that the closure of the Strait of Hormuz is "hitting the global economy", with international efforts underway to protect the vital shipping route.

The Office for National Statistics (ONS) will release Government borrowing figures for the previous financial year on Thursday.

The Treasury dismissed the Resolution Foundation's projections as "pure speculation", noting that even the report's authors acknowledged the conflict's impact remains highly uncertain.

A Treasury spokesperson said: "The report reinforces why we are right to focus on making the UK more resilient by securing greater energy security and improved public finances."