Chancellor Rachel Reeves has been strongly advised against implementing tax rises in response to the severe economic shock triggered by the US's war with Iran. The Labour chancellor is under mounting pressure to devise measures that assist struggling families without compromising fiscal stability or breaking government borrowing limits.
Emergency Meeting with Bank of England Governor
Ministers are scheduled to hold an urgent meeting with the governor of the Bank of England next week to discuss strategies for helping households cope with the escalating cost of living crisis caused by the Middle East conflict. The situation has already led to dire predictions, including a projected increase in the average annual household energy bill by £332 in July, according to the latest forecast from Cornwall Insights.
Widespread Economic Consequences
Experts have issued warnings that further rises in petrol and diesel prices are inevitable following attacks on energy infrastructure in the region. There are also growing concerns that the conflict could drive up inflation, potentially impacting interest rates and prompting a rise in mortgage rates, thereby exacerbating financial strain on UK citizens.
Economists have highlighted the increasing risk that Ms Reeves may be forced to either abandon her "iron-clad" borrowing rules or resort to tax increases. Martin Beck, chief economist at WPI Strategy, told the Telegraph: "The risk is that an energy shock, even one that isn't long-lasting, could leave the UK with higher underlying inflation, higher interest rates, weaker real incomes, lower investment and a smaller economy and tax base by 2029-30."
Fiscal Rules Under Scrutiny
Paul Johnson, former director of the highly respected economic think tank the Institute for Fiscal Studies, suggested that Ms Reeves might need to relax her fiscal rules to avoid imposing tax hikes. Mr Johnson stated: "They may end up needing to be flexible on their fiscal rules, because this is the kind of situation in which you may not want to be increasing taxes or cutting spending in order to keep borrowing down."
In response, Conservative leader Kemi Badenoch posted on X, formerly Twitter, criticising Labour's approach: "Labour's answer to the 'worst energy shock in history'? Higher taxes. Families already pay too much." She accused Labour of being "weak abroad. Weak at home" and claimed Keir Starmer "has no backbone," advocating instead for spending cuts, tax reductions, and business support to "get Britain working again."
Government Response and Future Plans
Last week, Ms Reeves confirmed that funding has been set aside to support households reliant on heating oil, the cost of which has doubled in recent weeks. She also mentioned "working through" a longer-term strategy to assist other households once the energy price cap lifts in June. "We've got some time, and we are working through in the Iran response board (a group of Treasury ministers and officials) different approaches that we could take, including looking at more targeted options," she explained.
Ms Reeves expressed concern over the nation's "high debt" and downplayed the likelihood of a broad energy bailout similar to the £35 billion package implemented after Russia's invasion of Ukraine. Her fiscal rules strictly prohibit borrowing for day-to-day spending and require debt to fall as a percentage of Gross Domestic Product (GDP) by 2029/30, adding complexity to the decision-making process amidst the ongoing crisis.
