Ministers should implement a series of measures – including lower speed limits on the roads – to prevent Donald Trump’s war on Iran causing long-term damage to the UK economy, a Labour-linked think tank has said.
Modelling by the Institute for Public Policy Research (IPPR) suggests inflation could rise to 5.8 per cent if the conflict in the Middle East continues, costing the Treasury up to £8bn a year in higher debt interest payments and slashed tax revenues.
In response, the organisation says the government should bring in a temporary energy price cap of £2,000 to curb inflation and a 10p cut in fuel duty.
These should be coupled with broader energy demand reduction strategies, such as lowering speed limits, they say.
The world’s energy watchdog, the International Energy Agency, has already recommended countries slash speed limits and use other strategies, including working from home, to cope with soaring oil prices and supply problems.
The conflict has left the Strait of Hormuz, crucial to the world’s oil supply, blocked.
Motoring groups are among those who have long advised drivers they can save fuel and money if they drive below the speed limit. One of the reasons is that once a driver goes above a particular speed, extra fuel is used to deal with increased air resistance.
Sam Alvis, associate director at IPPR, said: “A well-designed intervention, that pairs capping prices with clear incentives to reduce energy demand, would not only protect living standards but prevent the need for damaging interest rate rises, and insure against the risk of more severe damage.
“This is cost-effective, and if permanent damage is avoided, this actually saves the government money.”
He added: “The lesson from Liz Truss is clear: it’s not intervention that spooks markets, it’s poor policy design and an ignorance of investors’ concerns.”
William Ellis, senior economist at IPPR, said: “The UK cannot afford to sit back and let another energy shock drive up inflation and damage the economy. The UK economy and public finances are expected to take a significant hit from the Iran conflict, regardless of whether the government intervenes. The Bank of England is not well-suited to respond, given the lag that it takes for interest rates to influence demand.
“However, as the Bank set out last week, it is still likely to increase interest rates to guard against second-round effects and high inflation expectations – particularly if the conflict escalates. The government can act now where the Bank can’t, with a well-designed policy that acts to cap prices only in the most damaging scenarios.
“At worst, this would save about as much as it costs – but if permanent damage or sharp interest rate rises are avoided, this could end up saving money.”
The IPPR’s inflation forecast is nearly three times the Bank of England’s 2 per cent target.
The think tank also cautioned that real GDP growth could plummet to a mere 0.3 per cent.
It also called for “targeted, progressive” taxes, such as a strengthened windfall tax on energy profits.
The package of measures would cost up to £5bn per year depending on the severity of the shock, the report said, but the costs would be offset by lower borrowing costs and higher tax revenues.
A Treasury spokesperson said: “This is not our war and that is why we did not join it. Our priority is de-escalation. We are getting debt and borrowing down while supporting families and businesses through this crisis.
“Thanks to our decisions, the energy price cap has fallen by £117. We have extended the 5p fuel duty cut until September, supporting households using heating oil, boosting pay for millions, and freezing rail fares and prescription charges.”
