Chancellor Rachel Reeves could be forced to raise taxes further as the conflict involving Iran drives up oil and gas prices, fuelling inflation and straining the United Kingdom’s public finances. The tax burden is already projected to reach 38.5 per cent of gross domestic product, the highest level since the Second World War.

Although the Office for Budget Responsibility recently increased the Chancellor’s fiscal headroom to £23.6 billion, economists warn that higher energy prices and inflation could quickly erode that cushion. Rising debt interest costs, welfare payments and pension spending, combined with pressure to boost defence funding, may eliminate any remaining flexibility ahead of the autumn Budget.

The Institute for Fiscal Studies estimates that raising defence spending to 3.5 per cent of national income could cost around £35 billion annually, potentially requiring significant tax rises or deep cuts to other departments. At the same time, senior figures at the Office for Budget Responsibility caution that increasing taxes faster than economic growth risks harming investment, employment and the country’s productive capacity.

Economists say that if energy prices remain elevated, the Chancellor’s headroom could shrink sharply, increasing the likelihood of further tax hikes. The mounting fiscal pressures are expected to dominate discussions ahead of the next Budget statement.