LONDON, United Kingdom: The UK autumn Budget could be tough as the Middle East conflict pushes up inflation, borrowing costs and pressure on economic growth, Chancellor John Healey said.
Healey told the Financial Times that developments in the Middle East were affecting inflation, growth and government borrowing costs.
He said the October 28 Budget would maintain a fiscal buffer against economic uncertainty. Government borrowing costs rose earlier in the week.
Economists also expect inflationary pressure to reduce the fiscal headroom created under the previous Budget through tax increases and departmental spending cuts.
Healey did not specify how much headroom the Treasury would retain. However, he said both he and Prime Minister Andy Burnham remained committed to meeting the government’s fiscal rules.
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One key rule requires the current Budget to move into surplus by the end of Parliament, excluding investment spending.
Defence spending is also adding pressure to the fiscal outlook. Healey told the FT that Britain remained committed to raising defence spending to 3.5% of gross domestic product by 2035, in line with its NATO commitment.
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Separately, the Treasury plans to lower the Green Book discount rate from 3.5% to 3%. The change is intended to make long-term investment in projects such as schools and roads easier to justify. Healey is due to deliver a major speech on the economy on Monday.
