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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 automobiles.
Inside hours of the UK chancellor saying her Spring Assertion, the prospect of an escalating commerce conflict posed a brand new menace to the £9.9bn of headroom she had given herself in opposition to the various dangers going through the financial system.
Richard Hughes, head of the impartial Workplace for Funds Accountability, warned {that a} full-blown international commerce conflict might get rid of that headroom, whereas some economists mentioned the chancellor could possibly be compelled to boost taxes in her autumn Funds.
“This represents the crystallisation of one of the risks that we highlighted around 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 are in intense negotiations with our US counterparts on cars, steel and every other type of tariff.”
She mentioned the US and UK had a broadly balanced commerce relationship and in addition prompt that Britain wouldn’t instantly retaliate. “We don’t want to get into a trade war,” she informed the BBC.
Business secretary Jonathan Reynolds admitted the tariffs had been “challenging, there’s no way to avoid saying that”.
He informed a world commerce convention on the Chatham Home think-tank that the UK had not “wanted any tariffs applied” throughout negotiations with the US.
However Reynolds additionally gave clear hints that the UK might water down its digital companies tax (DST), which raises £800mn a 12 months largely from US tech giants, to safe a tariffs cope with Washington.
“It’s not as though DST was put in place as if it can never change or we would never have a conversation about it,” he mentioned.
The OBR’s Hughes mentioned that, in a worst-case state of affairs the place the US levied further 20 proportion level tariffs internationally and the UK retaliated, “we would lose about 1 per cent of GDP at its peak”.
He mentioned that may weigh closely on progress subsequent 12 months — which the OBR has forecast will hit 1.9 per cent — and would decrease progress within the medium time period by 0.75 per cent.
“That kind of hit to the economy would also be a hit to revenues,” he mentioned. “It would have implications for expenditure because of its impact on inflation.
“That kind of shock would be enough to wipe out the £10bn of headroom Rachel Reeves has set aside.”
Hughes warned that the chancellor’s headroom was “a tiny fraction of the array of risks and shocks that could hit the UK economy in the next five years”. He added: “It’s a very small margin to set aside.”
He mentioned that on high of tariffs there have been dangers to the UK’s home productiveness outlook, a warning to Reeves that the OBR may re-evaluate its constantly optimistic evaluation of Britain’s progress potential.
“There’s a lot of uncertainty about recent figures and what they mean for UK growth and output for workers,” he mentioned. “If growth were just 0.1 per cent less per year over the next five years, that would be enough to wipe out that headroom.”
Many economists suppose Reeves could possibly be compelled 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 in opposition to the form of Trump-related initiatives seen in a single day.
The US is the second-largest export vacation spot for UK-made automobiles, accounting for 17 per cent of the trade’s exports after the EU, which accounts for 54 per cent, in response to the Society of Motor Producers and Merchants.
The UK’s 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 value £6.4bn, in response to the Workplace for Nationwide Statistics.
Whereas the UK exported £60.4bn of products to the US in 2023, it bought companies of £126.3bn in the identical 12 months, in response to the latest figures obtainable from the ONS.
UK luxurious automotive manufacturers similar to Jaguar Land Rover, Aston Martin and Bentley can be hit onerous by the tariffs since they don’t produce any automobiles within the US.
Ian Henry, an automotive manufacturing knowledgeable who runs the AutoAnalysis consultancy, mentioned some luxurious manufacturers similar to Rolls-Royce and Bentley might need extra flexibility to soak up the upper tariffs by chopping margins at sellers or by making an attempt to cut back the price when autos arrive within the US.
“For UK car exporters, this is a very challenging development,” mentioned Tomasz Wieladek, economist at T Rowe Value. “Some of the very high-end producers might be able to pass the cost of tariffs on to consumers, because their customers are price-insensitive. For all other UK automakers, this policy will severely restrict market access.”
Whereas constructing a brand new plant within the US would take years, Henry prompt manufacturers similar to JLR and BMW-owned Mini might take into account assembling autos within the US utilizing “completely knocked-down” parts.
However that choice can be prone to be tough for the reason that Trump administration has mentioned the 25 per cent tariffs will even apply to components sourced from exterior the US.
