Chancellor warns of difficult autumn Budget due to Iran war

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This warning was issued amid this week’s leap in Government borrowing, reflecting concerns among lenders about the inflationary impact of the US’s war in the Middle East.

Mr Healey said that he would ensure the UK emerges from his first Budget on October 28 with a solid “buffer against uncertainty.”

Economists have predicted that the fiscal buffer Rachel Reeves built up in her last budget, through a combination of tax rises and departmental spending cuts, will be squeezed by the inflationary pressures of ongoing global turmoil.

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This could limit Prime Minister Andy Burnham’s pledges to tackle the cost-of-living crisis, as well as spending plans across his wider agenda for Government.

The Chancellor told the Financial Times: “What’s happening in the Middle East is hitting inflation, it’s hitting growth, it’s hitting borrowing costs.”

He added: “It’s part of a more dangerous world that is more uncertain and it’s one of the challenges we have to meet in this country, but have to meet with other [countries].”

Mr Healey would not say how much fiscal headroom he planned to maintain above his spending plans after the Budget. The Treasury has to bring the Budget into surplus by the end of the Parliament, excluding investment per key fiscal rules.

The Chancellor says he is “in lockstep in our determination to meet the fiscal rules” along with the Prime Minister. He says this can be achieved “with a buffer against the sort of uncertainty that we have talked about”.

The Chancellor previously served as defence secretary under Sir Keir Starmer. He resigned after being unable to secure 3% of GDP spending on defence by 2030.

Now, as Chancellor, he has said the UK will hit its goal of raising defence spending to 3.5% of GDP by 2035, which is already a Nato commitment. He has said this will be set out at next year’s spending review.

The Chancellor has also announced changes to Treasury rules aimed at helping to speed up regional regeneration across the country.

A major change to the Treasury’s green book, its guide to evaluating the costs and benefits of Government projects and programmes, will be to lower something called the “discount rate”.

Reducing this from 3.5% to 3% will make it easier to demonstrate the long-term value of spending public money on building new schools and roads, among other projects.

Mr Healy is expected to make a major speech on Monday, which will include further information on the state of the economy.