Labour may be forced to slash spending to salvage 'really unhealthy' UK economy from Iran war stagflation shock

Published: 07:00, 28 May 2026 | Updated: 07:02, 28 May 2026 The economic consequences of the continued closure of the Strait of Hormuz could bite Britain hard enough to force Labour into public spending cuts, economist David Lubin has told the Daily Mail's Deep Dive podcast. Lubin, a senior research fellow at Chatham House and former head of emerging markets at Citi, argued that wealthy economies have yet to really feel the economic fallout of the Iran war, insulated so far by stockpile drawdowns, alternative pipeline routes and a global economy far less oil-hungry than during the energy crisis of the 1970s. He told Daily Mail foreign correspondent Chris Pleasance that the longer the Strait remains closed, the worse the shock will be for the global economy. The economic consequences of the continued closure of the Strait of Hormuz could bite Britain hard enough to force Labour into public spending cuts, economist David Lubin has warned If Donald Trump fails to secure a deal with Iran very soon, Lubin predicted, the world will likely suffer a severe bout of stagflation Iran War: The Looming Economic Crisis - Listen to the latest Daily Mail Deep Dive podcast If Donald Trump fails to secure a deal with Iran very soon, Lubin predicted, the world will likely suffer a severe bout of stagflation, when inflation soars while growth stagnates. Britain's economy is particularly exposed, he argued, already in a 'really unhealthy' shape with sticky inflation and decades of weak growth behind it. With further tax rises risking what Lubin called a 'catastrophic decline in economic activity', the government may have little choice but to swing the axe on spending, forcing a politically difficult shift in Labour's economic stance. 'It may well be that UK political debate is forced into acknowledging the need for public expenditure control,' the economist said. 'Whether that ends up being a limit on the increase in public spending, or outright expenditure cuts, who knows. 'But if the duration of this crisis is so unpleasantly long that governments can no longer hope it just passes, they will need to make very different, very difficult decisions within that triangle of options: cutting spending, raising taxes or borrowing more.' Lubin predicted the consequences for Britain, when they hit, will 'not be pleasant at all', with structural weaknesses in the economy compounded by a political backdrop that is denting investor confidence in the country. Pressure from the Iran war hit British households yesterday, as energy regulator Ofgem announced a 13 per cent rise in bills from July, adding £221 a year to a typical home. Britain's economy is particularly exposed, he argued, already in a 'really unhealthy' shape with sticky inflation and decades of weak growth behind it More broadly than the UK, Lubin warned that should the crisis deepen, governments could be forced to consider fuel rationing More broadly than the UK, Lubin warned that should the crisis deepen, governments could be forced to consider fuel rationing. Even in a best case scenario, he said it was 'easily imaginable' that employers would start asking staff to work from home to conserve energy, alongside guidance to turn down thermostats and limit air conditioning. This is because, he said, if a peace deal were announced tomorrow, it would still take time to get oil production back to pre-war levels. Lubin explained: 'I don't want to be overly pessimistic, but even if the Strait of Hormuz opens back up very quickly, it may still take time for oil output to recover. 'Oil wells in Iraq and Kuwait have been shut down. There's still lots of mines in the Strait, so insurance companies will be reluctant to insure ships passing through. 'One of the reasons this crisis has been kind of survivable so far is that reserves of oil have been drawn down. They will need to be replenished, constituting an additional source of demand. 'Prices will be elevated for some time, even in a best case scenario.' To hear Lubin's full analysis of the Iran war shock and what it means for Britain, search for Deep Dive, wherever you get your podcasts. The comments below have not been moderated. The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline. By posting your comment you agree to our house rules. Do you want to automatically post your MailOnline comments to your Facebook Timeline? Your comment will be posted to MailOnline as usual. Do you want to automatically post your MailOnline comments to your Facebook Timeline? 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