According to EY's pre-budget fiscal outlook for the UK, the UK government's fiscal surplus has shrunk to £11.3 billion from £23.6 billion in March; this surplus could worsen to a £7 billion deficit if the Middle East conflict continues to restrict energy supplies, push up inflation, and drag down economic growth.
The £11.3 billion estimate is based on EY's baseline forecast for the UK economic outlook, which assumes the Strait of Hormuz will reopen around the end of the third quarter, but tanker traffic will remain sluggish. However, under EY's unfavorable scenario—that the Strait of Hormuz remains closed until early or mid-next year, and UK inflation rises to 6% by the end of 2026—slower economic growth, rising unemployment, high borrowing costs, and a stock market decline would further turn the £11.3 billion surplus into a deficit of approximately £7 billion.
Peter Arnold, chief UK economist at EY, said: “£11 billion is only about 1% of total tax revenue, which means there is almost no room for error in public finances. With such a small margin, even a relatively mild change in economic growth, inflation or UK government bond yields could change the fiscal situation by billions of pounds. If the Middle East conflict continues for a long time, it could completely wipe out the fiscal margin and put the government on a path of violating fiscal rules.”
