New Chancellor Healey inherits £10 billion headache from Iran war
Key Points
- Chancellor John Healey's headroom against the fiscal rules has fallen from £23.6 billion at the Spring Forecast to around £10 billion
- Higher energy prices from the conflict in the Middle East are estimated to deliver a £14 billion hit to the public finances
- Borrowing in the financial year to date sits £2.7 billion above pre war forecasts despite a better than expected June
- Healey's buffer is far below the £29 billion average held by Chancellors between 2010 and 2024
New Chancellor John Healey begins his time in No.11 with around £10 billion of headroom against the fiscal rules, less than half the £23.6 billion available at the Spring Forecast, analysis by the Resolution Foundation shows.
The think tank published its analysis on Tuesday (21 July) in response to the latest public sector finance data from the Office for National Statistics, warning that the conflict in the Middle East has already inflicted serious damage on the UK’s fiscal position.
Higher energy prices driven by the war are estimated to deliver a £14 billion hit to the public finances. That impact has eroded most of the buffer Healey inherited when he took over the Treasury under new Prime Minister Andy Burnham.
The June data itself contained a sliver of good news. Borrowing came in £300 million lower than expected for the month. However, borrowing across the financial year to date remains £2.7 billion above the forecasts made before the war escalated.
Elliott Christensen, Senior Economist at the Resolution Foundation, said Healey begins his time in No.11 with a headroom headache as his margin for error against the fiscal rules is estimated to have fallen to just £10 billion following renewed hostilities in the Middle East.
“Today’s data should be taken as a reminder that the public finances remain on a knife-edge: despite lower-than-expected borrowing in June, the deficit remains off-track for the year-to-date just as the Iran war appears to be ramping up,” he said.
How Healey compares to past Chancellors
The £10 billion buffer puts Healey in historically uncomfortable territory.
Chancellors between 2010 and 2024 held an average of £29 billion of headroom against their fiscal rules, nearly three times what Healey now has to work with.
The figure does have some recent precedent in that it sits on a par with the headroom Rachel Reeves left herself after her first Budget in 2024, a margin that came under repeated pressure in the months that followed.
The Foundation said the new Government has an opportunity to put the public finances on a firmer footing, and that any new spending commitments must be fully funded from the start.
“Andy Burnham has promised his Government will be a fresh start and that should include focusing on how to put the public finances on a firmer footing with new policy announcements fully funded,” Christensen said.
The shrunken headroom shapes the choices facing Healey ahead of his first Budget.
A £10 billion margin leaves little room for unfunded giveaways, and any further deterioration in borrowing or energy prices would push the Chancellor closer to breaching his own fiscal rules.
The Foundation’s analysis suggests the war’s fiscal impact is still unfolding, with the deficit off track for the year and hostilities showing signs of intensifying rather than easing.
