UK fiscal leeway shrinks to about £12 billion amid Iran war fallout and weak growth
A new KPMG outlook shows Chancellor John Healey’s budgetary room falling to roughly £12 billion, down from £23.6 billion, due to higher borrowing costs from the Iran conflict and slower economic growth.
According to KPMG’s newest economic outlook, Chancellor John Healey will enter the October 28 budget with fiscal headroom of around £12 billion, a sharp decline from the £23.6 billion estimated in the spring. The contraction stems mainly from higher borrowing costs on UK debt, driven by a gilt sell-off tied to inflation concerns from the Iran war, which have already removed roughly £9 billion. Additional pressure comes from weak growth and expected downgrades by the Office for Budget Responsibility, potentially shaving off another £2 billion.
KPMG cautions that the Chancellor’s capacity to support growth or mitigate cost-of-living issues is now constrained, and restoring previous headroom would likely require tax increases or spending cuts, despite a pledge not to raise taxes on working people. The firm also forecasts inflation edging up to about 3.5% in the autumn and peaking near 4% early next year, with GDP growth around 1.3% in 2026 and a slight rise to 1.4% the following year.
Why it matters
The reduced fiscal space limits the UK government's ability to fund public services or tax relief before the upcoming budget.
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