Rachel Reeves is ‘running out of options’ to prevent the economy from falling into recession as a result of the Iran crisis, Labour MPs fear.
The Chancellor’s tentatively optimistic forecasts earlier this year have been shattered by the conflict, with soaring oil prices putting fresh pressure on household finances through higher energy bills and mortgage rates.
But economic experts have warned that if Ms Reeves tries to help struggling households with taxpayer handouts she risks breaching her own fiscal rules – which could lead to a surge in the cost of loan repayments made by the Government.
It comes after the think-tank which masterminded Sir Keir Starmer‘s rise to power urged him to raise income tax by 2p as a temporary solution to the crisis.
Such a move might reassure the markets but could be calamitous in electoral terms.
Ms Reeves said yesterday she had ‘found the money’ to offer a support package to the 1.7 million households that use heating oil, a common fuel source for homes in rural areas that are not connected to the main gas grid.
Heating oil is not covered by the energy price cap, which is set to fall next month.
Oil prices have soared on international markets since Iran effectively blocked the Strait of Hormuz, the vital Gulf waterway through which around a fifth of all the world’s oil is shipped each day.
Economists warn that Rachel Reeves (pictured) risks violating her own fiscal rules if she resorts to taxpayer-funded handouts for struggling households
Thai-flagged cargo ship Mayuree Naree on fire after being hit by Iranian missiles in the Strait of Hormuz, Iran
Tehran has warned that the price of oil could more than triple from its pre-war level to $200 a barrel.
It comes after figures released last week revealed that the British economy was flatlining even before the crisis erupted, with no growth in GDP recorded at all in January.
This was even worse than the meagre 0.2 per cent which analysts had expected.
Last night, Graham Stringer, a senior Labour MP and former minister, warned: ‘The Chancellor has failed to deal with the fundamentals of the British economy, such as the cost of energy. It means she has no leeway to give people immediate help.
‘She has to stop promising stop-gap measures and produce a serious Budget to get the economy going again.’ Another Labour MP said: ‘We know that Reeves is running out of options, and the Iran crisis is an external shock, but it is down to her that there is no slack in the economy with which to absorb that shock.’
Sir Howard Davies, the former chairman of NatWest and ex- deputy governor of the Bank of England, warned yesterday that a support package for households risked the cost of government borrowing skyrocketing.
The move has already resulted in a ‘very large increase’ in the cost of public borrowing which could make any support measures unaffordable, with the interest rate on short-term government debt jumping to 4.1 per cent from 3.5 per cent following the first US and Israeli strikes.
The rates are at their highest level in 12 months, reflecting the fact that financial markets fear the conflict will cause government spending to rise as inflation soars and defence costs rise.
Sir Howard said: ‘That is quite serious and shows the markets are not at all confident that the Government’s fiscal position is under control.
‘Obviously it sounds good that the Government is thinking of trying to help people with heating bills. [But] they do have to be aware that it can add significantly to their cost of borrowing.’ The higher rates have already started to feed through to the mortgage markets, with the best-value deals being pulled by banks and building societies.
On Friday, Ms Reeves and Energy Secretary Ed Miliband met with petrol retailers and energy suppliers at Downing Street to urge them not to ‘profiteer’ on the back of motorists during the crisis.
Labour Together, the controverisal think-tank which backed Sir Keir’s drive to succeed Jeremy Corbyn, said the temporary 2p income tax rise would generate £17 billion a year to fund a cap on energy prices at their levels before the outbreak of the war.
