IFS warns Iran war threatens UK Budget plans as island inflation runs ahead

The Institute for Fiscal Studies (IFS) has warned that the impact of the Iran war poses significant risks to the UK government’s spending plans, according to BBC News. The BBC presented the think tank’s assessment as a threat to Chancellor Healey’s Budget plans.

For the island, two questions follow. What might a squeezed UK Treasury mean here? And how might rising fuel costs add to inflation that is already running well ahead of the UK’s? Much depends on decisions not yet taken in London or Douglas. What follows is analysis, not forecast.

What the IFS is warning about

As reported by the BBC, the IFS’s concern is that the war’s economic impact threatens the government’s fiscal plans. The BBC report does not set out the detail. In general, though, higher energy costs weigh on growth and can add to public spending, and both make borrowing targets harder to meet.

Fuel prices are a political problem elsewhere too. The BBC reports that US President Donald Trump has struck a deal to import diesel from Russia, hoping to ease fuel prices ahead of next month’s midterm elections. Both Republican and Democratic lawmakers have criticised the move.

If the Chancellor’s room for manoeuvre narrows, the usual options are spending restraint, more borrowing or higher taxes. The IFS warning, as reported, does not say which the Treasury will choose. Further UK tax rises are a possibility, not a certainty.

Prices on the island

Manx inflation was already running ahead of the UK’s before the latest warning. Isle of Man CPI stood at 4.1% in August, against 3.1% in the UK. The island’s RPI was 5.3%.

The gap opened in the spring. Manx CPI was 2.9% in March, below the UK’s 3.3%, then jumped to 4.9% in April and stayed there in May, while UK inflation eased to 2.8%. Island CPI then fell to 4.6% in June and 3.9% in July, before rising again in August. The Bank of England’s Bank Rate stands at 3.75%.

Energy is one possible channel for further pressure. The BBC reports that rural communities reliant on heating oil are vulnerable to price rises as the weather turns colder, and some have no choice but to pay. Island households that heat their homes with oil may find that familiar.

Diesel is another. A cancer charity, Daft as a Brush, and a minibus firm, Teesside Minibus Hire, told the BBC they were struggling with pump prices. For an island that depends on sea freight, fuel costs can feed into freight charges and then into shop prices. Freight costs were among the issues on which the two Chief Minister candidates set out differing views at a hustings in the Legislative Council Chamber this week.

A new government in Douglas

The timing is awkward. MHKs will choose between Kirrie Jenkins and Chris Thomas as Chief Minister at a special sitting of the House of Keys on Tuesday. The winner needs at least 13 of the 24 votes. They will then pick the ministers who run government departments, including Treasury, and those ministers will have to respond to whatever emerges from London.

Local finances featured at the hustings too. Chris Thomas said a Rates Amendment Bill was already drafted and could reach the House of Keys by November. Kirrie Jenkins said rates reform must be agreed with local authorities rather than imposed.

Inheritance tax and relocation

The island has no inheritance tax. Higher UK taxes would, on paper, widen the difference between the two systems. But the difference could also narrow. Kemi Badenoch’s Conservatives have pledged to scrap inheritance tax on family homes. The party is in opposition and trailing Labour and Reform in the polls, so any such change is far from certain.

Any increase in people moving to the island would add to demand for housing and services, both prominent in the Chief Minister contest. Kirrie Jenkins wants a clear definition of ‘affordable’ housing. Chris Thomas has proposed a dedicated housing and planning policy minister. Both candidates have backed a health charge on new arrivals.

What to watch

• The Chancellor’s Budget choices, and any tax changes with knock-on effects for the island.
• Heating oil and diesel prices through the winter.
• Whether Manx CPI resumes its fall or climbs again in the coming months.
• The new Council of Ministers’ approach to freight costs, housing and the public finances after Tuesday’s vote.

The IFS warning makes the UK fiscal outlook harder, but it does not settle how the Chancellor will respond. For the island, the clearer near-term concern is inflation, already above the UK’s, and how fuel costs at the pump, in the oil tank and on the shelves might add to it.