The ongoing conflict in Iran may lead to a £30 billion increase in government borrowing this year, according to experts’ warnings. This projected economic impact poses significant challenges for Chancellor Rachel Reeves and the Labour party.

As the government faces mounting pressure to address the rising cost of energy bills for low-income households and energy-dependent businesses, the need for additional borrowing becomes more pressing. Recent data from the Office for National Statistics revealed that government borrowing for the year up to March totaled £132 billion, which was nearly £20 billion lower than the previous year’s figure and £700 million below the Office for Budget Responsibility’s forecast.

Despite March recording the lowest borrowing figure since 2022 at £12.6 billion, it still exceeded expectations. Economist Elliott Jordan-Doak from Pantheon Macroeconomics anticipates a challenging year ahead beyond the temporary boost for Chancellor Reeves.

While surging petrol prices are expected to generate higher VAT revenues for the Treasury and windfall taxes from North Sea producers, the economic repercussions of the energy crisis could offset these gains by reducing tax revenues.

Moreover, the anticipated rise in unemployment, as warned by former Bank of England rate-setter Michael Saunders, could result in a spike of 150,000 job losses in the UK, impacting the welfare budget and income tax receipts. The government also faces increased borrowing costs due to rising interest rates on UK government bonds.

Chief economist Thomas Pugh from RSM UK estimates that borrowing could surpass pre-war forecasts by £30 billion this year. However, as long as the increase in borrowing remains temporary, it may not necessitate further tax hikes by Chancellor Reeves.

Investment strategist Lindsay James from wealth manager Quilter suggests that tax adjustments are likely to be implemented to stabilize public finances despite potential implications on economic growth. Chief Secretary to the Treasury, James Murray, emphasized the government’s efforts to reduce borrowing and maintain energy security amidst global uncertainties.

Recent tax changes, such as the increase in employer national insurance contributions, have boosted tax receipts, but debt interest costs have also escalated to the second-highest annual level on record. Pantheon Macroeconomics’ Jordan-Doak estimates a £12 billion increase in the government’s interest bill compared to previous projections.