Households could soon face energy bills nearing £2,000 annually, as the ongoing conflict in Iran continues to push gas prices upward. Meanwhile, the likelihood of a government bailout dims due to escalating borrowing costs.

According to forecasts from Cornwall Insight, Ofgem’s energy price cap, which regulates the price per unit for those not bound by fixed tariffs, might be set at £1,972 for a household with standard energy consumption during the July to September timeframe.

Previously, on March 4, predictions indicated the cap would be £1,801. From April to June, the cap is already set at £1,641.

The situation coincides with an unexpected increase in government borrowing, which surged to £14.3 billion in February. This financial strain places public finances in a delicate position, even before considering the Iran conflict, thus reducing the likelihood of an energy relief package.

Some members of Parliament advocate for loosening borrowing restrictions to support a cost-of-living aid package. However, the latest data from the Office for National Statistics, alongside the increased borrowing costs fueled by the Iran conflict, complicate these efforts.

This morning, the yield on 10-year government bonds climbed to its highest point since the Global Financial Crisis.

The Government borrowed £14.3bn in February, ahead of expectations 

Economists say that rising energy prices and the impact on inflation risk widening the Chancellor’s deficit. 

The difference between Government spending and income was £2.2billion higher than in February last year and nearly double the £7.4billion forecast by the Office for Budget Responsibility in November last year.

It marks the second-highest level for February since records began.

The ONS said the increase was driven by the timing of debt interest payments and higher spending, which offset an increase in tax receipts.

Borrowing for the 11 months of the financial year to March was £125.9billion, £11.9billion less than in the same period in the previous year.

Tom Davies, senior statistician at the ONS, said: ‘Borrowing was higher than the same month last year and was the second-highest February figure on record.

‘While receipts were up on last year, that was outweighed by a rise in spending, including the later timing of some debt interest payments.

‘However, across the first 11 months of this financial year as a whole, borrowing was down, as receipts increased by more than spending.’

The Middle East war has pushed up UK borrowing costs amid fears of a prolonged inflation shock, driven by surging energy prices. 

Bond markets have been affected by the conflict, but Britain is considered particularly vulnerable because it has the highest inflation among the G7.  

If gilt yields remain elevated, it will cut the Chancellor’s headroom by £7.1billion, according to estimates by consultancy Pantheon Macroeconomics, which will make it difficult for the Government to launch an energy bailout if prices remain elevated.

‘The pressure on the Government—from both within the Labour Party itself and the public—to cushion the blow to households from higher energy costs will be great,’ said Pantheon’s UK economist Elliott Jordan-Doak. ‘The Chancellor will again have to make difficult decisions in the Autumn Budget unless hostilities end quickly and energy prices subside.’

He added that the borrowing figures leave ‘the public finances in a more precarious position heading into the latest energy price shock’.

Bonds across the world have been affected by the Middle East turmoil but Britain’s are seen as especially vulnerable because it already has the highest inflation among the G7 group of advanced economies.

Despite dire figures, Labour claims it left public finances ‘better prepared’ before the crisis struck. 

James Murray, chief secretary to the Treasury, said: ‘We have the right economic plan. Because of the choices we made before the conflict in the Middle East began, we are better prepared for a more volatile world. We doubled our headroom and borrowing was forecast to be lower than the G7 average.’

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