UK Budget Faces £8 Billion Annual Cost from Iran Conflict, IPPR Says - News and Statistics - New Zealand News Beep

May 8, 2026

The conflict with Iran is projected to add an annual cost of PS8 billion to the UK budget for Chancellor Rachel Reeves, according to economists, as the war drives up inflation and dampens growth. The Institute for Public Policy Research (IPPR), a left-leaning think tank, has warned that higher interest payments on government debt combined with lost tax revenues will amount to approximately PS32 billion by 2030.

The IPPR noted that the full economic impact depends on how long the war between the United States and Iran continues. It cautioned that a closure of the Strait of Hormuz could push UK inflation to 6 percent due to surging oil and gas prices. This would heavily affect public finances because interest payments on roughly a quarter of the country’s PS3 trillion debt are tied to inflation, potentially triggering billions of pounds in extra annual costs for Ms. Reeves.

The think tank attributed more than PS4 billion of additional costs to slower economic growth, which would result in weaker tax receipts. To counter the inflation threat, the IPPR called on Ms. Reeves to introduce measures supporting households, including cutting fuel tax by 10 pence per litre and capping household energy bills at PS2,000 per year for a typical home. The IPPR estimated these tax cuts and energy subsidies would cost the government around PS5 billion.

However, the IPPR argued that such policies would also suppress inflation, saving the Treasury on interest payments while supporting household spending. This, it said, would improve economic growth and boost tax revenues, meaning the measures would largely pay for themselves. William Ellis, an IPPR economist, stated that this approach would be a better tool for taming inflation than relying on the traditional method of raising interest rates. He noted that the Bank of England is not well suited to respond due to the lag in how interest rate changes influence demand, and that the government can act now where the central bank cannot, with a policy designed to cap prices only in the most damaging scenarios. He added that at worst, the policy would save about as much as it costs, but could end up saving money if permanent damage or sharp interest rate rises are avoided.

The Bank of England last week held interest rates at 3.75 percent while publishing scenarios predicting the economy’s reaction to different war trajectories. Financial markets anticipate the Bank will raise interest rates at least twice in the coming year. The IPPR also recommended that the government cut speed limits to reduce fuel use, suggesting 20 miles per hour on urban roads and 60 miles per hour on motorways, alongside encouraging car-sharing and working from home to further save on petrol and diesel.

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