A severe but plausible worsening of the conflict in the Middle East could cost the UK public finances £16 billion a year by 2029-30, according to new research from the Resolution Foundation published on Wednesday (21 April).
The think tank’s analysis highlights how the ongoing turmoil has already pushed up fuel and energy prices, denting household living standards and adding pressure on the Chancellor’s fiscal rules – though a buffer built in the last Budget would still protect them even in a bad scenario.
So far, the domestic economic impact of the Middle East conflict has been more contained than the shock from Russia’s 2022 invasion of Ukraine. Gas prices spiked by just 78p per therm at their peak in March 2026, compared with a staggering 300p per therm rise after the Ukraine invasion.
Yet the UK appears unusually exposed among major economies. Despite British GDP being only half as energy-intensive as the global average, both the IMF and OECD have cut their UK growth forecasts for this year by 0.5 percentage points, the largest downgrades for any G7 country.
This vulnerability stems in large part from the UK’s heavy reliance on gas, which makes up 62% of household energy consumption – higher than in any other G7 nation. UK interest rates have also shown particular sensitivity to global developments.
For a typical recent first-time buyer coming off a fixed-rate mortgage, monthly payments have already risen by around £100 since the conflict began.
Energy costs already rising
Petrol prices have climbed around 20% and diesel by 36% amid the turmoil, while energy bills are forecast to increase by up to 20% in July.
The Resolution Foundation notes that a further escalation could sustain some of the sharpest economic hits seen so far: a 9% drop in equity prices, a roughly 0.5 percentage point rise in interest rates, and UK GDP ending up 0.9% lower after three years.
In that scenario, public sector borrowing would be around £16 billion higher annually in 2029-30 – erasing nearly three-quarters of the fiscal headroom the Chancellor secured in her most recent Budget.
Crucially, however, the government’s fiscal rules would still hold thanks to that buffer.
The Foundation urges the Chancellor to keep any help with rising energy bills tightly targeted and temporary. Broad, unfunded universal support could backfire by pushing interest rates higher still. Borrowing an extra £20 billion for household aid, for instance, could lift mortgage rates by another 0.4 percentage points.
On the monetary policy front, the report suggests the Bank of England may have room to avoid an overreaction to the energy-driven inflation spike.
The labour market is considerably softer today than in 2022: unemployment stands at 4.9%, compared with 3.8% in March 2022.
With workers in a weaker position, big pay rises look unlikely, reducing the risk of a damaging wage-price spiral. That should give the Bank pause before hiking rates in response to what may prove a temporary inflation bump.
We’re about to get poorer
No-one knows which direction the current conflict in the Middle East will take, but we do know that it will make us all poorer, said Simon Pittaway, Senior Economist at the Resolution Foundation.
He added that the cost of filling up the car has already increased, and from July, so too will energy bills.
“The conflict is going to make the state poorer too. A deterioration in the conflict that sustains some of the worst hits to the economy could deal a £16 billion hit to the public finances.
“The Chancellor deserves credit for building up enough of a buffer in last year’s Budget to withstand a hit of this scale. And by keeping any support with energy bills targeted and temporary, she should be able to weather this latest economic shock with her fiscal rules intact.”
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