The Iran war has been good for Starmer — to a point

Mujtaba Rahman is the head of Eurasia Group’s Europe practice. He posts at @Mij_Europe.

The war in Iran has improved U.K. Prime Minister Keir Starmer’s chances of remaining in office.

Make no mistake, his underlying position is still weak. Yet as the tenuous ceasefire looks like it may unravel, the likelihood of Starmer facing a leadership challenge after the May 7 regional elections to the Scottish and Welsh parliaments and English councils is falling. In fact, Labour members of parliament who previously questioned his authority are now reluctant to destabilize his government in the middle of an international war.

And yet, the conflict that is helping him politically also risks undermining the economic strategy his premiership depends on.

So far, Starmer’s handling of the crisis hasn’t been flawless. The U.K. was too slow to send a warship to the Mediterranean, irritating allies including Cyprus, the United Arab Emirates and Jordan. Relations with the U.S. have also deteriorated after U.S. President Donald Trump criticized Starmer for his initial refusal to permit U.S. aircraft from flying out of U.K. bases to bomb Iran. In fact, the “special relationship” is now so strained, senior Whitehall officials worry intelligence cooperation could be affected.

But domestically, the war’s political impact has been an undeniable positive for Starmer, who has found himself on the right side of both public and Labour Party opinion.

Voters are wary of being drawn into another Middle East conflict, and they support a prime minister who is willing to stand up to Trump. Meanwhile, many MPs scoff at the idea of Deputy Prime Minister Angela Rayner, or any other senior figure for that matter, handling this crisis any better, and say this is no time for more instability.

But while the conflict has shored up Starmer’s short-term political position, Downing Street is increasingly concerned about its economic consequences.

Labour ministers had been hoping voters would begin to notice an improvement in living standards this year, and those hopes are now in doubt: Inflation is expected to remain closer to 3 percent than the Bank of England’s 2 percent target, and interest rates are unlikely to fall as much as previously forecast. Moreover, mortgage rates have already begun to rise again, creating further difficulties for a government that has made the cost-of-living crisis its central political priority.

Starmer is, therefore, preparing the British public for an economic shock. In public, the government’s mantra is that the conflict’s impact will depend on how long it lasts. And in private, it’s drawing up contingency plans to help households with energy bills.

But ministers are warning there is no fiscal space for universal help to limit energy bills, like the £40 billion package introduced by former Prime Minister Liz Truss in 2022 after Russia’s invasion of Ukraine. The Iran war has already pushed up government borrowing costs, consuming a substantial portion of Chancellor Rachel Reeves’ recently announced £23.6 billion of headroom against her fiscal rule to balance income and spending. And that means, the inevitable intervention will only be targeted at those who need it most.

Reeves is likely to face pressure to respond once Ofgem — the U.K.’s energy regulator — announces an increase in the energy price cap from July 1. But holding energy bills at current levels would cost the government around £6 billion which, given the reality of the chancellor’s fiscal rules, would leave limited scope for a bigger intervention. The government will also find it difficult to proceed with a planned 1 pence-per-liter increase in fuel duty in September, particularly if petrol prices rise further due to a protracted conflict.

As a result, the fear among ministers now is that voters will blame the government for higher energy and fuel costs, regardless of its international causes.

If the ceasefire fully breaks down and the war continues, government insiders also worry that Reeves will be forced to deliver a more generous support package of £10 billion or more, but without tweaking her fiscal rules as many Labour MPs — including some Cabinet ministers — would like. The Treasury believes the bond markets would then punish the government by further raising its already relatively high borrowing costs.

And with more borrowing off-limits, Reeves would be left with a difficult choice: cutting public spending or raising taxes.

The mood among Labour MPs, coupled with Starmer’s fragile position in his own party, makes spending cuts virtually impossible — which means the chancellor’s third budget this autumn might be the third one to increase taxes. This would, in turn, revive a cabinet debate over breaking Labour’s 2024 manifesto pledge to not raise income tax rates with an earmarked “defense tax” to protect Britain in the new world.

Ominously for Labour, voters have a golden opportunity to register their dissatisfaction with Starmer in the meantime, with the May 7 elections. And any boost the prime minister receives from his tougher stance against Trump could well be dwarfed by anger over rising prices.

All in all, Starmer’s Iran lifeline may prove short-lived. And while he needs Trump to end the war quickly and limit the economic damage, he might also need a prolonged crisis to keep his Labour critics at bay.