UK Faces 'Very Difficult Trade-Offs' as Iran War Hits Economy

The UK faces significant economic challenges due to the ongoing Iran war, according to analysts from the National Institute of Economic and Social Research (NIESR). The thinktank has warned that if oil prices and inflation remain high, the new prime minister will have to make 'very difficult trade-offs' in the next autumn budget.

NIESR expects inflation to rise to 3.8% over the next seven months, forcing Chancellor John Healey to find an extra £24bn by the end of the decade to maintain services and real-terms welfare payments. The thinktank has cut its forecast for the chancellor's spending headroom in the budget from just over £7bn to nearer £3bn.

The UK economy is expected to grow at a slower pace this year and in 2027 due to higher energy prices and uncertainty created by the on-off war. This would result in lost growth of £28bn over two years compared with forecasts in January.

NIESR director David Aikman cautioned that there will be a temptation to ease the strain on public finances through borrowing, but warned this would only cause further strife in later years. He emphasized that new commitments should be funded through taxation or savings elsewhere, not through further borrowing.