The world is facing a second energy crisis in four years. The Middle East conflict has damaged oil and gas infrastructure in the Persian Gulf, and closed off global supplies. This report recommends the government act urgently to mitigate the risk of Trump’s war in Iran from causing long-term damage to the United Kingdom (UK) economy and public finances. 

The report explores how a well-designed intervention that caps energy prices can limit inflation and insure against the worst outcomes. It also shows how the upfront fiscal costs would be offset by higher growth and lower debt payments. The report finds that a targeted package of support could reduce inflation, protect growth, avoid the need for damaging interest rate rises, and ultimately save the government money if the shock continues. This would include:

• introducing a temporary energy price cap – designed to activate only in the most severe scenarios – to limit inflation while maintaining incentives to reduce consumption
• implementing a temporary fuel duty cut to offset rising oil prices
• pairing support with measures to reduce energy demand, including lower speed limits
• funding support through targeted, progressive tax measures, including strengthened windfall taxes on energy profits.

Key findings

• The Iran war energy shock will impose significant costs on the UK economy, even if the government does not offer a universal support package. 
• Relying solely on interest rates to combat the inflation spike would be a mistake.
• A well-designed intervention that caps energy prices can limit inflation and insure against the worst outcome.