Reeves urged to raise taxes to avoid letting 'a good crisis go to waste'

 Donald Trump’s war in Iran threatens to burn a £16bn hole in Rachel Reeves’s fiscal plans, according to new analysis.

The Resolution Foundation warned that the conflict in the Middle East could destroy two thirds of Ms Reeves’s fiscal buffer in a “severe but plausible scenario”.

It means the Chancellor risks being left with only £7.6bn of her £23.6bn safety buffer if the Iran war persists. This could force her to raid taxpayers again to restore some headroom.

Ms Reeves is already raising taxes at the fastest rate in the G7, having announced increases of £67.5bn at her past two Budgets. She is bound by her fiscal rules to ensure day-to-day spending is covered by revenues by the end of the decade.

The Resolution Foundation urged the Chancellor to raise taxes further to “avoid letting a ‘good crisis go to waste’”.

The think tank said if the conflict carried on and more energy bill support was required, or if Britain needed to fund higher defence spending, “then the arguments for raising tax to do so are strengthened by the nature of the global crisis that we now face and need to increase our resilience in a more uncertain world”.

Its analysis suggested that the British economy would be 0.9pc smaller by the end of the decade in a severe scenario.

The warning is likely to attract attention in Downing Street, given the think tank’s close links to Labour. Its previous boss Torsten Bell is now pensions minister, while the Resolution Foundation has also acted as a launchpad for several key Treasury figures, including Dan Tomlinson, the exchequer secretary.

Simon Pittaway, senior economist at the Resolution Foundation, said: “We would like to see the Government get to a point where the public finances just look a bit healthier, and we’re not constantly operating on what are still, even at £20bn or so, quite historically thin headroom buffers.”

He added: “The best way to get there is through efficient tax raising and tax reforming moves that the Government has so far dabbled in, but could go a lot further [with].”

Mr Pittaway suggested an example of this would be to overhaul stamp duty and replace it with a better-designed tax.

The Resolution Foundation’s analysis also showed that British households are on course to spend £11bn more on fuel and energy bills this year than they would have if the US hadn’t attacked Iran.

It said that the impacts on British families’ living standards are already being felt.

Forecasts are ‘pure speculation’

Petrol prices are up by a fifth and diesel by more than a third, while energy bills are forecast to rise by up to 20pc from July.

Meanwhile, the average first-time buyer coming to the end of their fixed-term mortgage will be £1,200 worse off a year from surging interest rates.

The think tank said that, while it is impossible to predict where the crisis is headed, Ms Reeves may be forced to offer more support to the worst-affected households if it persists.

It urged her to stay within the fiscal rules to avoid the ire of bond investors who already demand a premium to buy UK government debt.

A Treasury spokesman said the Resolution Foundation forecasts were “pure speculation”, adding: “The impact of the conflict is, as the report’s authors say themselves, highly uncertain.

“The report reinforces why we are right to focus on making the UK more resilient by securing greater energy security and improved public finances. We entered this conflict in a stronger position because of the choices this Government took to build economic stability.”

The spokesman added: “We are boosting our energy security, backing British industry and protecting households in a targeted and timely way.”