Chancellor warns tough Budget looms as Trump’s war with Iran hits UK economy

The Chancellor has warned of a difficult autumn Budget as the British economy faces the impact of US president Donald Trump’s war in the Middle East.

John Healey issued the warning following a sharp increase in Government borrowing earlier this week, which reflected lender anxieties over the inflationary consequences of the US war with Iran.

Speaking to the Financial Times, Healey stated that he would ensure the UK emerges from his initial Budget on October 28 with a resilient "buffer against uncertainty".

Economists have predicted that the fiscal buffer Rachel Reeves constructed during her last budget—using a combination of tax rises and departmental spending cuts—will be squeezed by the inflationary pressures of ongoing global turmoil.

Such pressures could constrain Prime Minister Andy Burnham’s ambitions to address the cost-of-living crisis alongside his wider spending plans for Government.

Speaking to the FT, the Chancellor said: "What’s happening in the Middle East is hitting inflation, it’s hitting growth, it’s hitting borrowing costs."

He added: "It’s part of a more dangerous world that is more uncertain and it’s one of the challenges we have to meet in this country, but have to meet with other [countries]."

Healey refrained from disclosing to the newspaper the exact amount of fiscal headroom he intends to maintain above his post-Budget spending plans.

A key fiscal rule obliges the Treasury to bring the Budget into a surplus by the end of the Parliament, excluding investment.

He told the newspaper that both he and the Prime Minister were "in lockstep in our determination to meet the fiscal rules", adding this would be delivered "with a buffer against the sort of uncertainty that we have talked about".

The Chancellor has faced criticism from the Conservatives after failing to recommit to allocating 3% of GDP to defence by 2030.

Upon resigning as Sir Keir Starmer’s defence secretary, Healey previously suggested that meeting this threshold was essential to ensure national security.

However, he informed the FT that the UK remains committed to fulfilling its Nato target of increasing defence spending to 3.5% of GDP by 2035, noting that this will be set out in next year’s spending review.

The Chancellor has additionally announced revisions to Treasury rules designed to help accelerate regional regeneration throughout the country.

A significant modification to the Treasury’s green book—its guidance for assessing the costs and benefits of Government projects and programmes—will involve lowering the "discount rate".

Reducing this benchmark from 3.5% to 3% will make it easier to demonstrate the long-term value of spending public funds on constructing new schools and roads, among other projects.

This announcement arrives ahead of a major speech on the economy Healey is scheduled to deliver on Monday.