Lower speed limits could help stop Iran war damaging UK economy, think tank says
Ministers should implement a range of measures, including lower speed limits on roads, to prevent Donald Trump’s war on Iran from causing long-term damage to the UK economy, a Labor think tank has said.
Modeling by the Institute for Public Policy Research (IPPR) suggests inflation could rise to 5.8 per cent if conflict in the Middle East continues, costing the Treasury up to £8bn a year in higher debt interest payments and cuts to tax revenues.
In response, the organization said the government should introduce a temporary £2,000 cap on the price of energy and a 10p cut in fuel duty to reduce inflation.
These should be combined with broader energy demand reduction strategies, such as lowering speed limits, they say.
The International Energy Agency, the world’s energy watchdog, has already advised countries to lower speed limits and use other strategies, including working from home, to cope with rising oil prices and supply problems.
The conflict led to the blockage of the Strait of Hormuz, which is vital for the world’s oil supply.
Automobile groups have long been among those advising drivers that they can save fuel and money by driving below the speed limit. One of the reasons for this is that extra fuel is used to cope with increased air resistance when the driver goes above a certain speed.
IPPR Deputy Director Sam Alvis said: “A well-designed intervention that caps prices, combining clear incentives to reduce energy demand, will not only protect living standards but also prevent the need for damaging interest rate rises and provide insurance against the risk of more serious 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 is not intervention that is spooking markets, but poor policy design and ignoring investor concerns.”
IPPR senior economist William Ellis said: “The UK cannot sit back and allow a new energy shock to fuel inflation and damage the economy. Regardless of whether the government intervenes, the UK economy and public finances are expected to take a significant hit from the Iran conflict. Given the delay required for interest rates to impact demand, the Bank of England is ill-suited to respond.”
“But as the Bank noted last week, it is likely to raise interest rates to guard against second-round effects and higher inflation expectations – especially if the conflict escalates. The government can now act where the Bank cannot, with a well-designed policy that caps prices only in the most damaging scenarios.”
“At worst, this will save as much as it costs, but if permanent damage or sharp interest rate increases are avoided, this could end up saving money.”
The IPPR’s inflation forecast is almost three times the Bank of England’s 2 per cent target.
The think tank also warned that real GDP growth could fall to just 0.3 percent.
He also called for “targeted, progressive” taxes, such as strengthening windfall taxes on energy profits.
The report stated that the cost of the measure package could rise up to £5 billion per year depending on the severity of the shock, but the costs would be offset by low borrowing costs and high tax revenues.
A Treasury spokesman said: “This is not our war and that’s why we haven’t joined. Our priority is de-escalation. We are borrowing and borrowing money while supporting families and businesses through this crisis.”
“Thanks to our decisions, the energy cap has fallen by £117. We have extended the 5p fuel duty cut until September, supported heating oil households, increased wages for millions and frozen rail fares and prescription charges.”
