MINISTERS faced calls to strengthen the energy windfall tax and reduce speed limits today after experts warned that the Iran war could cost the Treasury up to £8 billion a year.

New modelling from the Institute for Public Policy Research (IPPR) predicted that inflation could rise to 5.8 per cent while real GDP growth falls to 0.3 per cent should there be a prolonged stalemate in the Middle East conflict.

The think tank called for “targeted, progressive” taxes to mitigate the economic fallout from inflation-linked debt interest payments and lower tax revenues, such as strengthening the Energy Profits Levy.

Currently, the levy is a 35 per cent tax on top of the standard 40 per cent rate applied to profits from British oil and gas extraction.

The IPPR also backed the introduction of a temporary energy price cap at £2,000, a temporary 10p fuel duty cut to offset rising oil prices and lowering speed limits to reduce energy demand.

Its inflation prediction, measured by the Consumer Price Index (CPI), is well above the Bank of England’s 2 per cent target.

The package of measures would cost up to £5bn per year depending on the severity of the shock, the IPPR report said.

However, the think tank argued that, given the cost of doing nothing, implementing them could save the government £6-10bn per year and at worst would be fiscally neutral.

The Bank of England warned that interest rates may rise later in the year, after leaving them unchanged at 3.75 per cent last week.

IPPR senior economist William Ellis said: “The UK cannot afford to sit back and let another energy shock drive up inflation and damage the economy.

“The government can act now where the bank can’t, with a well-designed policy that acts to cap prices only in the most damaging scenarios.

“At worst, this would save about as much as it costs — but if permanent damage or sharp interest rate rises are avoided, this could end up saving money.”

IPPR associate director Sam Alvis said: “The lesson from Liz Truss is clear: it’s not intervention that spooks markets, it’s poor policy design and an ignorance of investors’ concerns.

“With the right approach, the government can act decisively and responsibly at the same time.”

The Treasury said: “We are getting debt and borrowing down while supporting families and businesses through this crisis.”

TUC General Secretary Paul Nowak said: “Working people are being hammered by Trumpflation - with fuel and housing costs soaring.

“And the longer Donald Trump’s illegal war goes on, the bigger the threat to living standards.

“Ministers must do everything they can to shield hard-pressed households and firms from the damaging economic impacts of this illegal war.”