Iran shock halves Healey’s Budget room before October tax test

KPMG says John Healey could have only about £12 billion of room left under the government’s fiscal rules when he delivers his first Budget on 28 October — roughly half the £23.6 billion available at the spring forecast.¹

The professional services firm attributes around £9 billion of the loss to higher government borrowing costs after the Iran conflict. Weaker growth and a likely downgrade to the Office for Budget Responsibility’s migration forecasts could remove another £2 billion.²

• KPMG’s central estimate is around £12 billion, not a confirmed final figure of £11.6 billion.²
• The starting point is the £23.6 billion headroom recorded in the March Spring Forecast.²
• KPMG expects inflation to reach about 3.5% this autumn and peak at roughly 4% in early 2027 as higher energy prices reach household bills.³
• The firm forecasts UK growth of 1.3% in 2026, with activity slowing in the second half of the year.⁴
• Tax rises and spending reductions are possible responses, but neither has been announced as government policy.²

The squeeze is coming through two channels at once. More expensive debt servicing leaves less money against the fiscal rule, while inflation weakens household spending and makes interest-rate cuts less likely. KPMG expects the Bank of England to raise rates before the end of 2026, probably in November, if energy prices stay elevated.³

That leaves Healey facing competing demands rather than a single obvious fix. The government wants to offer cost-of-living help, raise defence spending and fund regional investment, while its fiscal rule limits additional day-to-day spending. KPMG says restoring the spring buffer could require higher taxes or spending cuts, with capital gains and inheritance tax among the possible areas of consideration — not settled decisions.²

The estimate is KPMG’s scenario, not an OBR forecast. Its primary report gives the result as “around £12bn” and does not publish a separate final £11.6 billion calculation. The firm’s warning is therefore best read as a measure of how quickly the Chancellor’s margin could disappear, not as a Budget announcement.

Footnotes

1. The Independent, “Chancellor’s headroom ‘to halve because of Iran war inflation and weak growth’”, 21 September 2026 ↩

2. KPMG, UK Economic Outlook, September 2026, public finances section ↩ ↩² ↩³ ↩⁴ ↩⁵

3. KPMG, UK Economic Outlook, September 2026, inflation and interest-rate forecasts ↩ ↩²

4. KPMG, UK Economic Outlook, September 2026, UK growth forecast ↩