Since the Strait of Hormuz closure reshaped global energy markets in March, Britain's fiscal position has deteriorated week by week — and the Office for Budget Responsibility is finally admitting it didn't see the full damage coming last time.

The OBR Confession

The OBR released a review of its forecasting models in which it acknowledged it underestimated the fiscal damage caused by the 2022 Russia-Ukraine energy shock. According to City AM, the watchdog conceded that the surge in Russian gas prices — which rose roughly five times — hit public finances harder than its models predicted.

The damage came from three directions: spiking debt interest costs, rising welfare payments linked to inflation, and the government's commitment to maintaining real-terms increases in departmental budgets. Revenue from windfall taxes on energy companies partially offset the blow — but not enough.

Now the OBR says it will apply those lessons to this year's Budget, which means its next set of forecasts will almost certainly show higher projected borrowing than any previous estimate.

The Numbers Already Look Bad

Oil prices are up approximately 40% since the Iran war started in March, according to ZeroHedge citing City AM analysis. European wholesale gas prices have doubled over the same period.

The 2022 shock was severe enough that it nearly broke the UK fiscal framework under Liz Truss. That shock started from a lower baseline. This one started with the UK already running significant deficits.

Chancellor Rachel Reeves has been warned directly, per City AM reporting, that government borrowing is set to spike as a direct result of the Iran conflict. The OBR's updated modeling framework means that spike will be larger than previous official estimates suggested.

The Bank of England's Worst Case

The Bank of England's own scenario analysis puts the stakes plainly. According to ZeroHedge, the Bank has warned that in a severe disruption scenario, UK inflation could exceed 6% — which would force it to reverse every interest rate cut made in the past two years.

That means higher mortgage costs, tighter credit, and more pressure on businesses already dealing with elevated energy prices. The Bank's analysis assumes continued disruption in the Strait of Hormuz, which peace negotiations have so far failed to resolve.

What Mainstream Coverage Is Getting Wrong

Left-leaning coverage has focused heavily on Reeves being the victim of an external shock — framing the UK's fiscal position as something that happened to her government.

Reeves entered office with minimal fiscal headroom after her predecessor Jeremy Hunt had already burned through most of the buffer. She then spent down what remained. The OBR's own self-criticism about 2022 modeling raises a harder question: if the government knew the OBR had underestimated the 2022 shock, why was there no contingency buffer built into the 2025-2026 fiscal plan for the risk of another energy shock?

Right-leaning outlets like ZeroHedge have been faster to connect the dots between UK debt trajectory and energy vulnerability — but they've sometimes overstated the immediacy of a full fiscal crisis without acknowledging that UK gilt markets remain functional for now.

Britain's government made a bet that energy markets would stay calm. That bet lost.

The 2024 Preview Nobody Acted On

This isn't even a surprise. Back in 2024, when Iran and Israel appeared to be approaching direct conflict, the OBR ran an initial analysis of what energy disruption could mean for UK public finances, according to City AM. That analysis existed. The modeling work was done.

Whether anyone in the Treasury took it seriously as a planning scenario — or filed it away as a tail risk and moved on — remains unclear. Given that the UK entered this shock with zero fiscal cushion, the choice seems to have been made.

What This Means for Regular People

Higher government borrowing means higher debt costs. Higher debt costs mean less money for everything else — or higher taxes. The Bank of England reversing its rate cuts means mortgages don't get cheaper, and for many people on variable rates, they get more expensive.

Energy bills were already painful before March. They're worse now. And if wholesale gas prices stay doubled, the next round of price cap adjustments will hit household budgets hard.

Reeves will face a Budget this year where every line looks worse than the last one. The OBR just told her — in writing — that their previous forecasts were too optimistic.

She has no room to absorb that. Neither do British households.