The war in Iran and its Impact on the Senedd Election and Beyond

Jonathan Edwards

When Israel and the US decided to start its war against Iran on February 28, most of us were probably thinking about its geopolitical implications and the human suffering that was being unleashed.

When bombs started falling on Iranian targets it wasn’t a complete surprise, as US military assets have been converging on the Middle East for weeks.

However, as the war enters its third week, military planning by the aggressors hasn’t gone any further than an instant decapitation of the Iranian leadership. I know we shouldn’t be surprised when it comes to the erratic and incoherent actions of President Trump, but operation ‘Epic Fury’ is taking megalomania and derangement to an unsurpassed level.

We are living in a truly horrific period of history, where for all its faults the US as the standard bearer of international order has gone rogue.

I genuinely don’t think that enough consideration has gone into thinking through what this means. A strategy based on hope that the US will return to normality at the next electoral cycle doesn’t seem like much of a plan to me.

It is also a stark reminder of what happens when deeply unserious people find themselves with political responsibility.

Returning to Wales, it is difficult not to consider that the war in Iran will have a significant impact on the Senedd election. Campaigning is in full swing and postal votes will be landing next month. The next Welsh Government will be formed in a matter of weeks.

Labour’s spectacular fall from pole position since the general election has been caused by one major factor. The inability of the UK Government to make inroads into the cost-of-living crisis that has been blighting households for most of the current decade. Its hopes for a semblance of a recovery in time for May’s election stemmed from tentative signs that economic data was improving.

Inflationary pressures were finally easing, especially in the key sectors of energy and food. A major milestone for Labour’s campaign was this week’s Bank of England Monetary Policy Committee meeting (MPC), which was expected to reduce interest rates and consequently lower the costs of borrowing.

Labour’s campaign would have been based on the feel-good factor that the economy was moving in the right direction with households feeling better off and the party being able to claim that it was achieving its promises on living costs.

All of that is out of the water now, and as unjustifiable as it is, Labour will feel the wrath of the electorate who will inevitably punish incumbents as everyday prices movie upwards again. The immediate crisis point has been off gas grid oil prices where the cost of heating oil has more than doubled in two weeks.

Transport fuel prices have seen a less dramatic spike, but costs are already 10p a litre more expensive. It’s a sign of things to come for the rest of the economy.

Financial markets

Rather than looking at a rate cut this week, the MPC is likely to hold rates at their current level of 3.75%. However, in the financial markets that will lead to an increase in rates as lenders had forward planned their products based on the European Central Bank (ECB) easing monetary policy.

For the economic boffins the distinction between the Federal Reserve in the US and the Bank of England and the ECB is interesting. The Fed has a dual mandate to control prices and maintain employment. The MPC and the ECB have a single mandate to restrict inflation to 2%.

As an MP I made the case for a dual mandate approach to give policy makers maximum flexibility at points of crisis. The Chancellor may come to regret that this wasn’t a part of her initial plans on coming to power. It will be very interesting to see how different central banks respond to events.

Even if the war ends and the Strait of Hormuz reopens, inflationary pressures may not subside for some time. In a worst-case scenario where the war continues for many months analysts are predicting prices will surpass the 2008 record of $147.50 a barrel.

The immediate energy price spike is only the start of the economic impact. Eventually it will feed into increases in the cost of everything else. Food prices will increase, squeezing household budgets. As economic conditions tighten, unemployment will increase.

Far from looking at the economy turning a corner in 2026, therefore, the war in the Middle East means an effective 180-degree handbrake turn. The Chancellor who was hoping for an improving economic picture to provide some headroom within her fiscal targets will soon be facing some unenviable decisions at her next Budget as expected tax revenues don’t materialise.

Fiscal policy

It is difficult to see how UK Government fiscal policy going forward will not now include reduced expected public investment. It does not need spelling out what that means for the next Welsh Government. It would be irresponsible to fight the election on new major spending pledges when the fiscal outlook is darkening. The context in which draft manifestos were composed has completely changed.

As noted earlier, all this is bad news for Labour in May. It is also desperate for whoever replaces them. On assuming power, the next Welsh Government will face a reverse honeymoon experience. Public services under its control will be under financial duress as their allocated budgets won’t meet costs.

Public sector workers will be agitating for inflation busting salary increases. Most worryingly, the general population fed up with squeezed living standards will soon grow tired of their new political masters.

Jonathan Edwards was the MP for Carmarthen East and Dinefwr 2010-24.