UK Borrowing Hits Record High as Iran War Reignites the Inflation the Chancellor Feared Most

Quick Answer: UK government borrowing rose to £14.3 billion in February — £2.2 billion higher than a year ago and the second-highest February figure on record — as debt interest payments hit a record high. The data lands at the worst possible moment: energy prices driven by the Iran conflict are threatening a fresh inflation spiral that could force interest rates higher, increasing the cost of refinancing Britain’s already onerous debt burden precisely when the Chancellor has the least room to respond.

Some calm has returned to markets after a brutal week. Brent crude has pulled back from its highs and is currently trading around $108 per barrel. Gas futures have retreated but remain more than 10% above levels seen before this week’s intensification of attacks on Middle East energy infrastructure. The tension between fragile stabilisation and persistent underlying fear defines where we are — and it is the context in which the UK’s latest public finances data must be read.

The numbers from the ONS are uncomfortable on their own terms. February borrowing of £14.3 billion was £2.2 billion higher than the same month last year, partly reflecting the timing of debt interest payments — which hit a record high. That the UK is borrowing this much even before the Iran war’s full economic impact feeds through is a problem. That it is doing so at a moment when the cost of refinancing that debt is rising sharply makes it considerably more serious.

The Gilts Market Is Already Signalling the Problem

Worries that interest rates may need to rise to contain a new inflation spiral have sent the cost of financing UK government debt higher. Gilt yields — the interest rate the government pays to borrow — have climbed as markets price in the possibility that the energy shock transmits into sustained inflation requiring a policy response. This is the transmission mechanism that makes the public finances so exposed: higher energy prices push up inflation, which pushes up interest rates, which push up debt servicing costs, which push up borrowing, which push up gilt yields further.

The UK entered this crisis carrying debt at 92.9% of GDP — levels last seen in the early 1960s. The interest bill on that stock of debt is already the single most politically toxic line in Rachel Reeves’ budget. A sustained period of elevated rates, driven not by domestic conditions but by a conflict in the Gulf, would add billions to that bill with no offsetting economic benefit.

Reeves Is Caught

The Chancellor has previously indicated there is room for some financial support to help businesses and consumers manage high energy costs. That room is narrowing by the week. The energy shock that began with strikes on Iranian nuclear facilities has compressed what might have been a manageable fiscal challenge into an acute one. The longer the conflict continues, the less firepower the government retains to provide meaningful stimulus to an economy that was already stagnating before the first missile was fired.

The cruel irony is that the UK was, until very recently, on a trajectory of fiscal improvement. According to the IFS, cumulative borrowing in the first ten months of the financial year was running £15 billion below the same period last year — faster improvement than the OBR had forecast. January’s self-assessment revenues came in nearly £2 billion above forecast. The underlying fiscal picture was, cautiously, moving in the right direction.

The Iran war has arrived as a structural interruption to that trajectory rather than a temporary blip. The damage to Qatar’s Ras Laffan complex — responsible for around a fifth of global LNG supply — could take years to repair. Traders are still assessing the full cost. Gas prices have retreated from their most extreme levels this week but the structural supply constraint that drove them there has not been resolved.

The Sanctions Wildcard

US Treasury Secretary Scott Bessent’s suggestion that sanctions on Iranian oil could potentially be lifted represents the most significant intervention yet from the economic side of the US administration. It is, on its face, a desperate measure — US forces remain militarily engaged against Iran while Washington simultaneously floats the idea of allowing Iranian oil back into markets to contain gasoline prices that are threatening Republican electoral prospects.

The political logic is straightforward. The Russia oil waiver already granted — allowing Russian crude on tankers at sea to be purchased — established the template. Lifting Iranian sanctions could provide limited near-term price relief. But it would also, as critics have immediately noted, enable Tehran to continue funding the conflict that is causing the economic damage in the first place.

Netanyahu’s statement that the conflict could end “a lot faster than people think” offers a diplomatic exit. Israel’s pledge not to resume attacks on Iranian energy infrastructure provides some market reassurance. For Rachel Reeves, watching gilt yields and hoping the conflict ends before the spring borrowing figures make her fiscal position untenable, the next few weeks could not matter more.