Healey uses headroom as Iran war lifts U.K. deficit forecast to 4.2%

Bank and gambling taxes rise as fiscal cushion falls from £24 billion to £15 billion

U.K. Treasury chief John Healey used part of the headroom established last year to absorb the impact of the Iran war, narrowing the government’s cushion against setbacks to £15 billion from £24 billion in March. In a budget speech to lawmakers on Wednesday, Healey said the move was intended to protect the economy and family budgets. The Office for Budget Responsibility still found the government within its fiscal rules after new spending and tax measures, including higher taxes on banks and gambling firms. The OBR revised the deficit for the fiscal year ending early April 2027 to 4.2% of GDP from 3.6%.

“I have chosen to use some of the headroom established last year to absorb the impact of the Iran war, to protect the economy, and to protect family budgets,” Healey said. The Wall Street Journal reported that the outcome was in line with what economists had expected.

The government’s budget plans are guided by two targets, one of which requires day-to-day spending to be paid entirely from tax revenue, with borrowing used only to fund investment by the fiscal year ending at the start of April 2030. The Office for Budget Responsibility’s headroom estimate measures how much room the government has to meet that goal. In March, the OBR judged the government would reach the goal with £24 billion, equivalent to $31.93 billion, to spare. Wednesday’s assessment put the figure at £15 billion.

The war between the U.S. and Iran increased the day-to-day cost of running the U.K. government by raising energy costs, and it also increased the government’s interest bill. Those effects widened the budget deficit for the fiscal year ending early April 2027, which the OBR forecast at 4.2% of gross domestic product, compared with 3.6% previously expected.

The OBR’s near-term growth forecast was mixed. It raised its projection for this year to 1.2% from 1.1%, but cut its projection for 2027 to 1% from 1.6%. The agency forecast growth would reach 1.6% in 2028 and 1.8% in 2029, after the war weakened the U.K.’s near-term growth prospects.

“We did not want this war,” Healey told lawmakers. “It’s a war that has driven up costs on British families and businesses.”

The new spending and taxation plans aim to reduce the government’s budget deficit to 2.1% of GDP in the fiscal year that ends in 2030, and further thereafter. Healey announced modest new support for less wealthy households facing higher energy bills, alongside higher taxes on banks and gambling firms.