Thanks for joining me. Rachel Reeves is forecast to exceed borrowing targets by almost £19bn this year as the Iran war delivers a shock to the public finances.
The conflict in the Middle East means the Chancellor is at “risk of a larger overshoot” of borrowing this financial year, according to economists.
The Office for Budget Responsibility (OBR) said in March that it expects the Treasury to borrow £115.5bn in 2026-27. However, Pantheon Macroeconomics said the OBR is likely to revise the figure to £134.3bn at the Budget later this year.
It also warned Ms Reeves’s fiscal headroom will be cut by around £8.1bn as a result of the conflict, leaving her with a smaller cushion to deal with future shocks.
Rob Wood, chief UK economist, said the onset of war in the Middle East “has effectively ripped up the playbook for the coming years”.
He added: “The big picture is that the Government is facing serious fiscal pressure because of the war in Iran.
“Our base case is that the fiscal rules are unchanged, but greater near-term borrowing increases the risk that a sharper fiscal adjustment is needed to make the figures add up by the end of the forecast period.”
The public finances have been weakened by surging UK borrowing costs, which have climbed since the start of the Iran war and as pressure mounts over Sir Keir Starmer’s future.
On Tuesday, the yield on 10-year gilts, as UK bonds are known, rose by 0.03 percentage points to close above 5pc for the first time since 2008.
It remained above 5pc in early trading on Wednesday despite the Prime Minister surviving another leadership scare on Tuesday.
The Mandelson scandal that has dogged the Prime Minister has fuelled speculation that he could be replaced by a more Left-wing candidate who is more likely to increase spending and borrowing.
Mr Wood added: “Political pressure to deviate from the planned fiscal consolidation will likely increase after the local elections in May.
“We think all roads lead to higher borrowing than currently planned when the OBR delivers its next formal assessment of the finances.” Here is what you need to know.
Asian stocks fluctuated Wednesday while oil prices swung as talks to end the Iran war appeared to be at a standstill and the crucial Strait of Hormuz no nearer being reopened.
Donald Trump is unhappy with the latest proposal from Tehran as he wants nuclear issues dealt with from the outset, a US official said.
The US president has instructed aides to prepare for an extended blockade of Iran, The Wall Street Journal reported.
South Korea’s Kospi rose 0.3pc to 6,657.40 and the Hang Seng in Hong Kong gained 1.4pc to 26,029.02. The Shanghai Composite index traded 0.3pc higher at 4,091.01.
Australia’s S&P/ASX 200 slipped 0.3pc, to 8,689.50. Taiwan’s Taiex lost 0.6pc, and India’s Sensex gained 0.4pc. Markets in Japan were closed for a holiday.
Rising oil prices and a sell-off in tech stocks weighed on New York-listed companies on Tuesday.
Tech-focused stocks sank lower following a report that OpenAI, the creator of ChatGPT, had missed an internal target, according to the Wall Street Journal.
Shares in Nvidia, the chipmaker whose semiconductors are used to run ChatGPT, fell 1.6pc. Rival semiconductor company Broadcom declined 4.4pc. Oracle, the data centre company which has a $300bn deal to provide infrastructure to OpenAI, shed 3.9pc.
Concerns about the fragile ceasefire in the Middle East caused oil prices to climb and put stocks under pressure. Brent crude, the international benchmark, rose to $111 a barrel on Tuesday evening.
The S&P 500 fell 35.11 points, or 0.5pc, to close down at 7,138.80. The Dow Jones Industrial Average shed just 25.86 points, or 0.1pc, to end the session at 49,141.93. The tech-heavy Nasdaq slid 223.30 points, or 0.9pc, to 24,663.80.
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