The UK government came in below its annual borrowing target by £700m, official figures show – but the Iran war is likely to blow a hole in Rachel Reeves’s carefully calculated fiscal “headroom” over the coming months.

The government borrowed a net total of £132bn for the financial year ending in March, the Office for National Statistics said. This slightly undershot the £132.7bn that the Office for Budget Responsibility (OBR) had forecast just last month.

The total was £19.9bn less than the £151.9bn borrowed in the previous financial year.

For the month of March, public sector net borrowing – the difference between spending and income – was £12.6bn, which was £1.4bn lower than a year earlier. City economists had expected the March figure to be £10.3bn.

The annual figure was better than economists had expected after upward revisions for the previous two months. January’s record-breaking surplus was revised up to £32.2bn, while government borrowing in February was revised down from £14.3bn to £12.8bn.

Reeves announced £26bn in tax rises in her budget in November to lower debt and offset rising government spending on public services and upgrades to the UK’s infrastructure. She has implemented a fiscal rule that requires the government to fund day-to-day spending with taxes by the end of the parliament.

In February, the chancellor announced that her buffer – or headroom – to meet this rule by 2030 had increased in its latest projections to £23.6bn, from £21.7bn at the time of the November budget.

However, the conflict in the Middle East is expected to jeopardise this headroom, with rising inflation and potential job cuts as well as higher interest rates eating into this target.

The Resolution Foundation has forecast that a worsening Middle East conflict could deal a £16bn hit to the UK’s public finances by 2030, wiping out nearly three-quarters of Reeves’ headroom.