Reeves warned not to raise taxes to protect UK from Iran war economic shock
Rachel Reeves has been urged not to raise taxes in response to the economic shock of the US war with Iran.
Ministers will hold an emergency meeting with the governor of the Bank of England next week to discuss plans to help households experiencing rising costs of living due to conflict.
The average household energy bill alone is predicted to rise by £332 in July, according to latest forecasts from Cornwall Insights, and experts have warned that further rises in petrol and diesel prices are inevitable following attacks on the region’s energy infrastructure.
There are also fears that this could increase inflation, which could affect interest rates and lead to an increase in mortgage rates.
Economists have warned that all this means there is a growing risk that Ms Reeves will be forced to either abandon “tough” borrowing rules or raise taxes.
Martin Beck, chief economist at WPI Strategy, said: Telegram: “The risk is that an energy shock, even if it is not long-lasting, could leave the UK facing higher headline inflation, higher interest rates, weaker real incomes, lower investment and a smaller economy and tax base by 2029-30.
“If this happens, the chancellor may then need tax increases or spending curbs to restore compliance with fiscal rules.”
Paul Johnson, the former director of the highly respected economic think tank the Institute for Fiscal Studies, said Ms Reeves may have to relax her fiscal rules to avoid tax increases.
Mr Johnson said: “They may need to be flexible on their fiscal rules because this is the sort of situation where you might not want to raise taxes or cut spending to keep borrowing down.”
In response, Conservative leader Kemi Badenoch posted on her former Twitter account X: “Labour’s answer to the ‘worst energy shock in history’? Higher taxes. Families are already paying too much.”
He accused Labor of being “weak outside, weak at home” and said Keir Starmer had “no backbone”, adding: “There is an alternative: cut spending, cut taxes, get jobs back. Make Britain work again.”
Last week Ms Reeves confirmed she had allocated funds to support households reliant on heating oil, the cost of which has doubled in recent weeks, and was “working” on a longer-term strategy to support other households when the energy price cap is lifted in June.
“We have some time, and we are working with the Iran intervention board (a group of Treasury secretaries and officials) on different approaches we can take, including looking at more targeted options,” he said.
Ms Reeves also expressed concern about the country’s “high debt” and downplayed the prospect of a broad energy bailout similar to the £35bn package following Russia’s invasion of Ukraine.
Ms Reeves’ financial rules prevent her from borrowing to pay for day-to-day expenses and require her debt to fall as a percentage of Gross Domestic Product (GDP) by 2029/30.
