Economists are warning that UK Chancellor Andy Burnham will likely have to increase taxes or reduce public spending in his first budget, as the ongoing war in Iran begins to impact the UK economy. The government’s fiscal headroom—the amount of money it has available to spend without increasing borrowing—has dropped significantly, from £23 billion to around £5 billion. This buffer is crucial for absorbing unexpected economic shocks, such as those caused by conflicts or global market fluctuations. The Office for Budget Responsibility (OBR), an independent body that provides economic forecasts to the government, has started its assessment of the economy, a process that takes place over ten days before the Budget. The OBR’s findings influence how much the government will need to pay in interest on its debts, which in turn shapes the budget. A government source told The Times that the current economic forecast is “hugely challenging” due to the war in Iran, which has driven up oil prices and, in turn, the cost of government borrowing to its highest level in 19 years. Inflation has also risen to a five-month high, partly due to increased fuel prices and airfares, adding to pressure on households already struggling with the cost of living. Official data shows that inflation reached 3.1% in August, up from 2.9% in July, moving further away from the Bank of England’s 2% target. This trend is expected to continue, with economists predicting further increases in interest rates and energy bills, which will likely worsen financial pressures on UK households. Chancellor John Healey acknowledged the challenges, stating that the UK economy is “proving resilient” but attributing the inflation rise to the war in the Middle East. The Resolution Foundation, a think tank, estimates that the government’s fiscal headroom is now between £5 billion and £10 billion, partly due to Burnham’s cost-of-living commitments and a planned £4.7 billion increase in defense spending over five years. The organization’s chief executive, Ruth Curtice, noted that borrowing is expected to rise significantly, leaving the chancellor with few options but to raise taxes or cut spending, which will be particularly difficult given the political constraints of the current government’s manifesto.