Conflict in the Middle East could trigger an energy price shock that wipes out anticipated growth in living standards in the UK worth \u00a3300 for a typical working-age household over the coming year, a leading thinktank has warned.<\/p>\n
The Resolution Foundation said a \u201cdecent\u201d one-off increase in average living standards this year and a bumper rise for lower-income households could be reversed by rising oil and gas prices as the Iran conflict disrupts supplies<\/a>.<\/p>\n The UK\u2019s reliance on gas from the Middle East makes it especially vulnerable to an effective blockade of the strait of Hormuz, through which about 20% of the world\u2019s liquid natural gas is transported.<\/p>\n According to the thinktank\u2019s calculations in its analysis of Tuesday\u2019s spring forecast<\/a>, living standards for typical working-age households are on track to grow by \u00a3300 over the next year, or 0.9%.<\/p>\n The research director James Smith said the government should consider developing a social tariff to protect low-income households from any energy shock because an across-the-board support package had proven very costly in the past.<\/p>\n \u201cWe have called for the government to develop the infrastructure for a social tariff. Targeting people with high energy needs and low levels of income. Liz Truss showed us that if you try to support people across the board, that is very expensive.<\/p>\n \u201cThere is pressure from right and left on the government who say why are we worrying about [borrowing levels] and tightening our belts? This is exactly the reason. Because if the government says it can\u2019t do things like energy support, you know it has a big problem.\u201d<\/p>\n That argument against offering across-the-board energy support, as Truss\u2019s government did in the wake of Russia\u2019s invasion of Ukraine at the cost of \u00a335bn, was echoed by the Institute for Fiscal Studies.<\/p>\n Helen Miller, the thinktank\u2019s director, said: \u201cThis kind of government support is a key reason that debt has been rising in recent years. And, partly because bad shocks keep coming along, and partly because we are aiming only to stabilise debt in the better times, debt keeps rising over time. That can\u2019t go on for ever.<\/p>\n \u201cThe short answer is, rather than do something across the board, try to target help to where it\u2019s most needed.\u201d<\/p>\n The IFS also laid out the trade-offs from accelerating the government\u2019s pledge to spend 3% of GDP on defence. Bringing that target forward, to 2030, would cost \u00a314bn a year, wiping out planned spending increases in every other area, unless taxes were raised to fund the rise.<\/p>\n The Resolution Foundation\u2019s analysis of living standards suggested lower-income households are set for a larger rise in living standards of \u00a3800, up 3.9%, mainly because of the lifting of the two-child benefit cap<\/a> and an above-inflation increase in universal credit. This would be the second strongest year for living standards in the past two decades for poorer households.<\/p>\n However, if the recent rise in energy prices persists, the foundation said all the gains could be wiped out.<\/p>\n While the effect might not be as large as the increase caused by the Russian invasion of Ukraine, which sent food, oil and gas prices soaring, a rise this year in oil and gas prices could add a percentage point to UK inflation and \u00a3500 on to typical annual energy bills, it said.<\/p>\n