Tax rises loom as Hormuz crisis threatens to blow £7bn hole in Chancellor's plans

John Healey has been warned he faces a £7bn financial black hole if energy supplies from the Middle East remain choked off by Donald Trump’s Iran war.

New analysis by accounting giant EY suggests the Chancellor’s borrowing headache will go from bad to worse unless the Strait of Hormuz is reopened to oil and gas shipments.

It shows how crucial the outcome of the Middle East conflict will be in deciding whether Mr Healey will be able to fund Andy Burnham’s costly plans – or will need to raise taxes just to balance the books.

The report finds that Britain’s financial ‘headroom’, a buffer against meeting fiscal rules, has already more than halved from £24 billion to £11 billion ahead of this month’s Budget.

That is largely thanks to turmoil on bond markets which has sent UK borrowing costs soaring.

Deficit: The Chancellor John Healey's headroom has halved ahead of the Budget 

But a prolonged closure of the strait could hit the public finance outlook further, EY estimates – leaving Mr Healey falling short of fiscal rules, which oblige the government to target falling borrowing and debt.

In that scenario, with energy supplies choked off well into next year, inflation would head towards 6 per cent while growth would weaken, unemployment rise, borrowing costs climb further, and share prices fall – shrinking the headroom by an additional £18 billion.

Peter Arnold, EY’s UK chief economist, said it showed how Britain’s relatively small fiscal buffer left ‘very little margin for error’.

Mr Arnold added: ‘Relatively modest shifts in growth, inflation or gilt yields can move the fiscal position by billions.

‘A prolonged conflict in the Middle East would be enough to erase the headroom altogether, which would put the Government on course to miss its fiscal rule.’

Even outside this worst-case scenario it will be difficult for Mr Healey to find the £40 billion needed to pay for commitments to council house building, higher defence spending, social care and unfreezing the tax-free personal allowance, EY found.

That would have to come on top of a minimum £12 billion he needs to find to fund measures already announced to cap bus fares, cut VAT on electricity bills and deliver business rates relief to the hospitality sector.

The Chancellor’s hands will be tied because of promises not to put up income tax, corporation tax, employee national insurance and VAT and the political difficulty of putting up others such as fuel duty, the report found.

Instead, taxes such as capital gains tax, inheritance tax, and stamp duty could be in play, as well as windfall taxes on sectors such as banks.

Chris Sanger, EY’s UK tax policy lead, said: ‘We could see the Government’s larger ambitions signalled rather than funded at this Budget, with some of the more significant spend decisions deferred until the economic outlook is clearer or funded from post-election tax rises.

‘This would limit the immediate impact on households and businesses, but it postpones rather than alleviates the underlying fiscal pressure.’

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