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3 hours ago
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The war in the Middle East has sent oil and gas prices soaring – and Britain remains deeply exposed to global energy markets. If the shocks persist they will feed directly into household bills, business costs and inflation. On Tuesday, the Office for Budget Responsibility released projections that were finalised before the US-Israeli strikes began. Rachel Reeves was right to warn that household bills might rise. But she gave no clue as to whether her policy would be flexible enough to respond if they did.
In her spring statement the chancellor argued for fiscal discipline. That’s understandable. The OBR says borrowing will fall and that the “headroom” against her self-imposed rules has increased. Her message was that Britain needed “stability”. The logic is that discipline reassures markets, and that keeps borrowing affordable. But markets constrain the UK only insofar as its institutions let them. If energy prices spike, the economy suffers a drop in real income. The question is: who soaks up that loss? Households, firms or the state, via higher deficits? Privileging fiscal credibility might signal that she prefers households to absorb the shock rather than the state.
The OBR’s projected decline in borrowing relies on taxes climbing to a post-second world war high by 2030-31 and departmental spending shrinking as a share of GDP after 2027-28. That means real pressure on household budgets and public services unless growth outperforms expectations. Hardly a vote winner. It also means that if nothing is done to cushion the blow of sustained higher energy prices, economic growth will likely weaken or inflation will rise. Given the geopolitical turmoil, it’s hardly surprising that the OBR warns that defence spending will have to rise. Ms Reeves says fiscal credibility matters. But it will ring hollow if, as the Joseph Rowntree Foundation warns, real incomes fall between this April and 2029.
The chancellor will be judged on how she deals with any crunch. Her decisions must be seen to be fair. If there is any lesson to be learned from 18 months of policy U-turns it is that future burdens should not fall disproportionately on those least able to bear them. Taxing windfall gains properly would be a good first step. The war in the Gulf exposes Britain’s vulnerability to fossil fuels. This should make the case for investment in renewables and grid infrastructure. That’s the way to sustainably insulate the economy from energy shocks, rather than further drilling in the North Sea. Trade-offs in fiscal policy need proper scrutiny. If fiscal choices are to command public support, they must be seen to serve a social purpose, not just bond markets.
Ms Reeves wants stability. This shouldn’t mean rigidity. Fiscal rules are a political choice – as she demonstrated by changing them in October 2024. Nations such as the United States, Australia, Canada and Japan set broader objectives which fiscal policy serves. Britain should do the same. The worry ought to be inflation, the country’s external balance and its productive capacity, not arbitrary financial ratios. Locking in tight fiscal rules while the central bank drives up borrowing costs isn’t prudence; it’s giving financial interests a big say over democratic policymaking. If energy prices continue to rise, the test will not be how quickly Ms Reeves can bring down public debt, but how swiftly she will protect living standards and sustain public services.
