All of Britain’s fiscal headroom could be wiped out immediately if US president Donald Trump presses ahead with his hikes in import tariffs next week, the UK’s fiscal watchdog has warned.
The Office for Budget Responsibility (OBR), which vets all UK government fiscal decisions, said a global trade war as a result of Mr Trump’s tariffs could also knock one percentage point off Britain’s already weak economic growth.
The OBR made its warning as chancellor of the exchequer, Rachel Reeves, tried to stabilise the UK’s finances on Wednesday with sweeping spending cuts in her spring statement which the opposition Tories said was an “emergency budget”.
The chancellor said that if she didn’t act to cut spending now, the budget deficit by 2029 would be £4.4 billion. The fiscal tightening announced on Wednesday, including extra cuts to disability benefits, restored that current spending “headroom” to about £9.9 billion, she said.
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However all wiggle room could be lost if there is a global trade war on tariffs, the OBR warned. Ms Reeves said the UK government remains in talks with the US as Britain seeks to swerve the proposed US tariffs.
The OBR said it expects GDP to grow by just 1 per cent this year, compared with its previous forecast of 2 per cent, Ms Reeves told the House of Commons. She also outlined a £6 billion (€7.2 billion) reduction in government spending alongside the growth downgrade, as she pledged to stick to her fiscal rules.
“I am not satisfied with these numbers,” she said of the forecasts, claiming that her planning reforms – a key plank of the government’s agenda to lift growth – would add 0.2 per cent to GDP by the end of the parliament.
The UK economy has barely grown since Labour won a landslide election victory last summer, with opposition parties accusing Ms Reeves of talking down the economy before destroying confidence with more than £40 billion in tax hikes at the October budget.
“What the British people know is that this is a consequence of her choices,” said Mel Stride, the Conservatives’ treasury spokesman. “She is the architect of her own misfortune.”
Ms Reeves said the world has changed and pointed to international factors that are weighing on growth. US President Donald Trump has upended the global trade system with widespread tariffs, while European governments are having to divert billions toward defence spending as the White House reduces its support for the Continent against Russian aggression.
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Still, Britain’s weak economic outlook is a blow for the chancellor, who is having to cut back government expenditure to ensure she meets her key fiscal target, which requires day-to-day spending to be covered by tax receipts in the years ahead.
The chancellor has been forced into action because growth downgrades and higher borrowing costs have erased the historically-slim £9.9 billion margin she left herself against the rule at October’s budget.
Additional reporting – Bloomberg
