Donald Trump's war with Iran has blown up in his face and risks taking the US economy with it. The underlying problem has been building for years, long before Trump arrived, but he's made it worse. America is drowning in debt and running huge deficits. Bad for them, and bad for us. Britain is tied too closely to the US economy and financial markets to escape the fallout when it all blows up.
Debt levels and deficits
Both countries have been living beyond their means for decades. The US national debt is now a mind-blowing £30 trillion in sterling terms. That's almost 125% of its economic output, or GDP. In the UK, we owe £3 trillion, roughly 95% of GDP. The US is in a fiscal hole, but Trump keeps digging. We're in a fiscal hole too, and new PM Andy Burnham's spending spree will only make it deeper.
In 2026, the US will spend £1.6 trillion more than it earns. Its budget deficit is 5.8% of GDP. The UK faces a £116 billion deficit, around 3.6% of GDP. Again, the US is in a worse state. But it has one big advantage: the US dollar. It's the world's reserve currency, a safe haven in a crisis. People will always lend to America. Britain relies on a ragtag of foreign investors and hedge funds to keep us afloat. That's why our borrowing costs are the highest in the G7. But the US is pushing its luck too.
Iran conflict and oil crisis
Trump keeps promising victory in Iran, but Tehran's hardliners keep sucking up the punishment. They don't have voters to worry about. And they have a stranglehold on the crucial Strait of Hormuz shipping lane. They also have the Houthis in Yemen. If need be, they can block Red Sea shipping too.
Trump is running low on missiles. He's running out of support. He's resorted to hiding in 'catering crates', which lacks presidential dignity. Only a full-blown invasion could win this war, and only a madman would try that. Without peace, the oil crisis will intensify. Britain may be frying in a heatwave today, but winter is creeping closer. European gas storage levels are at record lows. Our energy bills could rocket. This morning, we learned the UK economy is already slowing.
Economic impact and warnings
The Treasury is worried. It's just warned that if Hormuz stays blocked for the rest of 2026, UK inflation could climb from today's 2.6% to as high as 4.3%. Growth would collapse to just 0.3% next year, a fraction of the predicted 1.6%. Our deficit could widen, despite the predicted £25 billion tax blitz in chancellor John Healey's autumn Budget. Or because of it. We're entering a doom loop.
So is the US. The Federal Reserve is under pressure to increase interest rates to curb inflation. It daren't do it. The US Treasury has to roll over $6 trillion of debt every three months. Higher rates will drive up servicing costs.
America already spends $1 trillion a year on interest on debt, more than it spends on defence. Welfare spending is out of control, just like ours. That's on Trump's predecessor, Joe Biden, and many presidents before him.
Both countries have let debt rage out of control. They're not the only ones. A crisis is brewing in Japan. Europe is sunk. Populations are ageing, and birth rates are declining. At some point, the crisis will blow up. If Iran doesn't trigger it, the artificial intelligence bubble just might.
And when it does, Trump won't be the only one to fall. Burnham will follow. Until then, he'll keep spending money we haven't got. While hoping the crisis blows up on somebody else's watch.
