Iran war could cost Treasury up to £8 billion a year

18 May 2026

Prolonged conflict in the Middle East could cost the Treasury up to £8 billion a year through higher debt interest payments and lost tax revenue, warns the Institute for Public Policy Research (IPPR).

The think tank says inflation could peak as high as 5.8% and is urging the government to act.

The IPPR recommends a temporary energy price cap at £2,000 to target the most severe scenarios and a 10p fuel duty cut, alongside lower speed limits to help reduce energy demand.

It says the package would cost up to £5 billion a year depending on the severity of the shock. At worst, the intervention is broadly fiscally neutral, with policy costs offset by lower borrowing costs and protected tax revenues, says the IPPR.

However, if intervention succeeds in preventing permanent 'scarring' damage to the economy, or in averting sharper interest rate rises, the government could stand to save between £6-10 billion a year compared to doing nothing, it adds.

Sam Alvis, Associate Director at the IPPR, said: 'A well-designed intervention, that pairs capping prices with clear incentives to reduce energy demand, would not only protect living standards but prevent the need for damaging interest rate rises, and insure against the risk of more severe damage.

'This is cost-effective, and if permanent damage is avoided, this actually saves the government money. Keeping interest rates lower and investment higher prevents any damage to deploying and using clean energy, the long-term solution to crises like this.'