Rising energy prices driven by the Iran war and trade barriers erected by major powers compel the new British government to integrate economic security into its national budget.
According to Atlas Diplomacy, a commentary titled “The Impact of the Iran War and Geoeconomic Tensions on the Burnham Government’s First UK Budget” by Roli Asthana has been published by Chatham House. This commentary argues that Prime Minister Andy Burnham’s government cannot rely solely on traditional domestic tax-and-spend policies to lower the cost of living and generate economic growth, as the war with Iran and global geoeconomic rivalries directly dictate inflation, energy, food, and interest rates in the UK. Below is a summary of the piece.
The first budget of Prime Minister Andy Burnham’s government, delivered by Chancellor of the Exchequer John Healey, aims to reduce the cost of living and generate growth and jobs; however, achieving these goals depends more than ever on international variables. The framework known as the “Makerfield Test,” which prioritizes economic security, energy resilience, and rebalancing investment toward underserved regions, underscores that the government’s domestic pledges cannot be met without reducing Britain’s vulnerability to external shocks.
The cost-of-living crisis in the UK has been heavily impacted by the Iran war and the link between domestic electricity prices and global gas markets. In October, as the war in Iran drove up wholesale gas prices, the UK energy regulator (Ofgem) raised the annual household energy price cap by £60 to £1,723, and analysts forecast a further 16 percent increase starting in January. Simultaneously, the Food and Drink Federation expects UK food inflation to exceed 6 percent by mid-2027 due to higher energy and fertilizer costs stemming from the Middle East conflict alongside climate disruptions.
In terms of investment and employment, global economic insecurity has further squeezed the government’s fiscal headroom. A global bond sell-off pushed the yield on 30-year UK gilts above 6 percent this month, driving up government borrowing costs. At the same time, London’s largest trading partners are escalating economic barriers: the United States has embraced tariffs, the European Union is bolstering its trade defense mechanisms, and China is leveraging its dominance in rare earth minerals while aggressively expanding exports.
To mitigate these vulnerabilities, the UK Treasury must place geoeconomics at the center of budget planning and implement five key measures: setting measurable targets to assess and reduce fiscal sensitivity to external shocks; cutting gas dependence by accelerating the £15 billion Warm Homes insulation plan and securing gas storage—where Britain holds only 12 days of supply compared to 89 days in Germany; establishing a strategic fertilizer reserve following the 2023 closure of the last major ammonia plant at Billingham; scaling up the £50 million critical minerals fund alongside a UK carbon border levy; and setting a clear multi-year trajectory for defense spending ahead of the November UK-EU summit and Britain’s upcoming G20 presidency./ Source
