Britain’s Borrowing Outlook Darkens as Energy Shock Deepens
Kuwait Says Oil Output Won't Recover for 10-12 Weeks After Hormuz Reopens CityAM.com is the online presence of City A.M., London's first free daily business newspaper. Both platforms cover financial and business news as well as sport and… Chancellor Rachel Reeves has been warned that government borrowing is set to spike as a result of the Iran war, as the Office for Budget Responsibility admitted it had underestimated the effects of the last energy price shock.
In a review of its forecasting models, theOBRsuggested it had learned lessons from Russia’s full-scale invasion of Ukraine, which led to gas prices rising by around five times.
It said the overall impact on public finances “was to significantly increase government borrowing and debt” despite some government revenue being raised by taxes on energy companies’ profits and higher wage growth.
The surge ingovernment borrowingwas driven by a rise in debt interest costs, welfare benefits, and the maintenance of real-terms increases to departmental budgets, according to analysis.
The OBR concluded that it would apply the lessons from its forecast review to the energy price shock caused by the Iran war in this year’s Budget.
The analysis suggests that the OBR could take a more pessimistic view on government borrowing, with oil prices jumping by around 40 per cent since the beginning of the war in March and wholesale European gas prices doubling.
Economists have warned that stalledpeace negotiations willlead to prolonged disruption across the Strait of Hormuz, a critical global trading route for oil tankers and large ships.
The Bank of England warned in a worst-case scenario analysis that continued disruption would push inflation above six per cent and force it to undo all interest rate cuts made in the last two years.
In 2024, when Iran and Israel appeared to be close to an all-out war, the OBR conducted an initial analysis of what disruption could mean for UK public finances.
The OBR then estimated that the UK government would have to borrow an average of £23.1bn more a year if there were a cut to energy supplies “comparable to the 1973 oil embargo”,City AMfound.
Economists have widely suggested that the current blockade on the Strait of Hormuz, triggered by the Iran war, is the worst global oil supply shock recorded in history.
International Energy Agency chief Fatih Birol said it was more serious than supply shocks in “1973, 1979 and 2022 together”.
| Product | Price | Change |
|---|---|---|
| Brent Crude | $102.14/bbl | +0.34% |
| WTI Crude | $96.90/bbl | +0.21% |
| EN590 Diesel | $846/MT | +0.18% |
| Jet Fuel A-1 | $1090/MT | +0.55% |
| Mazut M100 | $450/MT | -0.15% |
| Bitumen 60/70 | $470/MT | +0.08% |
| Sulphur Gran 99.5% | $470/MT | -0.44% |
| Urea 46% Gran | $650/MT | +1.12% |
| NPK 16-16-16 | $460/MT | -0.28% |
| Nat Gas TTF | $15.42/MMBtu | +0.92% |
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