Andy Burnham has been warned that the UK economy could barely grow next year if disruption in the Strait of Hormuz continues until the end of 2026.
Treasury sources have confirmed that internal modelling presented to the new prime minister and chancellor suggests UK GDP growth could be as low as 0.3% in 2027, as first reported by Bloomberg.
Government officials say they routinely plan for all possible scenarios.
The UK economy saw a strong start to the year, but growth then faltered with the conflict in the Middle East affecting some businesses. The Iran war has pushed up oil and fuel prices, and also disrupted supply chains.
On Thursday, official figures will show how much the economy grew between April and June of this year.
Economists are expecting growth of 0.4% for the three months.
Burnham and Chancellor John Healey were presented with a reasonable worst-case scenario of the Strait of Hormuz remaining effectively closed for the next five months, and no permanent US-Iran peace deal until the new year.
The Treasury modelling for that scenario was that the UK economy would grow by 0.9% over 2026 – slightly under the 1.1% forecast by the Office for Budget Responsibility (OBR) in March.
The prospect was much dimmer for next year, with just 0.3% growth projected – much lower than the OBR’s 1.6% forecast for 2027.
Under the modelling, inflation would peak at 4.3% in the first three months of next year. It currently stands at 2.6%, just above the Bank of England’s 2% target.
The prime minister and chancellor will face pressure to use the upcoming Budget on 28 October to ease the financial burden on households and businesses.
Since taking office three weeks ago, Burnham has announced policies including the removal of VAT from domestic electricity bills and bringing forward an already planned end to “subscription traps”.
But this week he told the ‘s Wake up to Money the announcements, aimed at tackling the cost of living, are not enough on their own, hinting at further support.
He has asked Healey to look at what more the government can do on the cost of living in the Budget, with the chancellor saying it will be his “main focus”.
But Healey has said he will oversee “strong fiscal discipline” – which will limit how much the government has to spend.
Burnham has said his government will stick to the party’s 2024 manifesto pledges not to increase people’s income tax, VAT or National Insurance contributions.
He also promised to follow the fiscal rules imposed by former Chancellor Rachel Reeves, which include a pledge to balance day-to-day spending with tax revenues by the end of the decade.