The Office for National Statistics reported that UK government borrowing in February 2025 was £14.3 billion, the highest February borrowing on record outside of the COVID-19 pandemic and far more than analysts had expected. Over the 11 months of the financial year so far, borrowing stood at £125.9 billion, which is £11.9 billion less than in the same period the previous year. Central government raked in £1,016.7 billion in revenues with one month left in the financial year, £79 billion more than the equivalent period in 2024-25.
According to market data, the conflict has sharply driven up energy costs, with oil prices briefly topping $119 per barrel and UK gas prices now around double what they were before the war started. Recent rises in oil and gas prices are expected to add around a percentage point to inflation and £500 onto typical annual energy bills. Economists predict inflation will bounce back up to as much as five percent over the coming months.
Financial markets have been roiled, with the FTSE 100 stock index rallying following sharp falls but remaining 2% down compared to last week. The UK's 10-year Gilt yield has risen from 4.23% to over 4.8% in the three weeks since the war started. Every 0.1% rise in Gilt yields adds around £2 billion a year to the national interest bill. Higher Gilt yields mean the Government must pay more to borrow money, which increases the national interest bill and reduces the Chancellor's flexibility for tax cuts or public spending.
Now that we have the conflict in the Middle East, I think it is utterly essential that the energy profits levy is removed.
Political reactions have been swift, with Prime Minister Keir Starmer saying the Government is watching the impact on households. Chancellor Rachel Reeves has held meetings with energy firms. Liberal Democrat leader Ed Davey demanded a guarantee that the Government will not allow the Middle East conflict to push up energy bills by £500. Scotland's First Minister John Swinney called on the Government to scrap a windfall tax on North Sea oil and gas.
The military conflict shows no sign of abating, with US President Donald Trump standing firm and Israeli President Benjamin Netanyahu targeting Iranian gas fields. Gulf countries overnight again came under attack from drones and missiles fired by Iran. The Strait of Hormuz remains blocked amid fears that Iranian missiles will target vessels. The conflict is unpredictable and it is not clear how long it will last.
Potential policy responses are under consideration, with markets suggesting interest rates could now rise in the coming months. The Chancellor could choose to invoke the fiscal rules' 'escape clause', allowing the targets to be suspended temporarily in the event of a significant economic shock.