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Rachel Reeves’ room for manoeuvre on public funds was thrown into stark reduction on Thursday after Donald Trump introduced 25 per cent tariffs on foreign-made vehicles.
Inside hours of the UK chancellor asserting her Spring Statement, the prospect of an escalating commerce struggle posed a brand new risk to the £9.9bn of headroom she had given herself towards the numerous dangers going through the economic system.
Richard Hughes, head of the impartial Workplace for Funds Duty, warned {that a} full-blown world commerce struggle might remove that headroom, whereas some economists mentioned the chancellor could possibly be pressured to boost taxes in her autumn Funds.
“This represents the crystallisation of one of many dangers that we highlighted round our central forecast,” Hughes mentioned on Thursday.
Reeves mentioned she hoped the US president could possibly be persuaded to exempt Britain from the tariffs earlier than they had been launched on April 2, saying: “We’re in intense negotiations with our US counterparts on vehicles, metal and each different sort of tariff.”
She mentioned the US and UK had a broadly balanced commerce relationship and in addition recommended that Britain wouldn’t instantly retaliate. “We don’t wish to get right into a commerce struggle,” she advised the BBC.
Enterprise secretary Jonathan Reynolds admitted the tariffs had been “difficult, there’s no technique to keep away from saying that”.
He advised a world commerce convention on the Chatham Home think-tank that the UK had not “needed any tariffs utilized” throughout negotiations with the US.
However Reynolds additionally gave clear hints that the UK might water down its digital services tax (DST), which raises £800mn a 12 months largely from US tech giants, to safe a tariffs take care of Washington.
“It’s not as if DST was put in place as if it will possibly by no means change or we might by no means have a dialog about it,” he mentioned.
The OBR’s Hughes mentioned that, in a worst-case situation the place the US levied further 20 proportion level tariffs internationally and the UK retaliated, “we might lose about 1 per cent of GDP at its peak”.
He mentioned that may weigh closely on development subsequent 12 months — which the OBR has forecast will hit 1.9 per cent — and would decrease development within the medium time period by 0.75 per cent.
“That form of hit to the economic system would even be a success to revenues,” he mentioned. “It could have implications for expenditure due to its impression on inflation.
“That form of shock could be sufficient to wipe out the £10bn of headroom Rachel Reeves has put aside.”
Hughes warned that the chancellor’s headroom was “a tiny fraction of the array of dangers and shocks that would hit the UK economic system within the subsequent 5 years”. He added: “It’s a really small margin to put aside.”
He mentioned that on prime of tariffs there have been dangers to the UK’s home productiveness outlook, a warning to Reeves that the OBR would possibly re-evaluate its constantly optimistic evaluation of Britain’s development potential.
“There’s a variety of uncertainty about current figures and what they imply for UK development and output for staff,” he mentioned. “If development had been simply 0.1 per cent much less per 12 months over the subsequent 5 years, that may be sufficient to wipe out that headroom.”
Many economists assume Reeves could possibly be pressured to boost taxes this 12 months to place the general public funds on a extra secure footing — even after Wednesday’s welfare and different spending cuts — and to “shockproof” them towards the form of Trump-related initiatives seen in a single day.
The US is the second-largest export vacation spot for UK-made vehicles, accounting for 17 per cent of the business’s exports after the EU, which accounts for 54 per cent, in keeping with the Society of Motor Producers and Merchants.
The UK’s most important items export to the US is equipment and transport tools, which in 2023 comprised £27.2bn of its gross sales to the US, or about 45 per cent of the full of products exported.
Inside this, automotive exports had been price £6.4bn, in keeping with the Workplace for Nationwide Statistics.
Whereas the UK exported £60.4bn of products to the US in 2023, it bought providers of £126.3bn in the identical 12 months, in keeping with the newest figures accessible from the ONS.
UK luxurious automotive manufacturers resembling Jaguar Land Rover, Aston Martin and Bentley could be hit laborious by the tariffs since they don’t produce any vehicles within the US.
Ian Henry, an automotive manufacturing knowledgeable who runs the AutoAnalysis consultancy, mentioned some luxurious manufacturers resembling Rolls-Royce and Bentley might need extra flexibility to soak up the upper tariffs by reducing margins at sellers or by attempting to scale back the fee when autos arrive within the US.
“For UK automotive exporters, this can be a very difficult improvement,” mentioned Tomasz Wieladek, economist at T Rowe Worth. “A few of the very high-end producers would possibly be capable of move the price of tariffs on to customers, as a result of their prospects are price-insensitive. For all different UK automakers, this coverage will severely prohibit market entry.”
Whereas constructing a brand new plant within the US would take years, Henry recommended manufacturers resembling JLR and BMW-owned Mini might think about assembling autos within the US utilizing “fully knocked-down” elements.
However that choice can also be prone to be troublesome for the reason that Trump administration has mentioned the 25 per cent tariffs can even apply to components sourced from exterior the US.
