The Iran war energy shock will impose significant costs on the UK economy, even if the government does not offer a universal support package.
As it drives up inflation, we estimate the Treasury could lose up to £8 billion a year from higher debt payments and lower tax revenues that result from lower economic growth. Relying solely on interest rates to combat the inflation spike would be a mistake.
In this report we explore how a well-designed intervention that caps energy prices can limit inflation and insure against the worst outcomes. We also show how the upfront fiscal costs would be offset by higher growth and lower debt payments.
To make this work, the government needs to learn the lessons from previous crises. The problem with the 2022 intervention was not universal support, but poor design and the wider policy package.
