Trump’s car tariffs pile pressure on Reeves’ new economic plan

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UK chancellor Rachel Reeves’ new economic plan came under immediate pressure on Thursday after US President Donald Trump’s imposition of 25 per cent car tariffs “crystallised” some of the many risks facing the economy.

Within hours of Reeves announcing her Spring Statement, the prospect of an escalating trade war posed a new threat to her strategy and the “very small” £9.9bn of headroom she had given herself.

Richard Hughes, head of the independent Office for Budget Responsibility, warned that a full-blown global trade war could eliminate that headroom while some economists said the chancellor would be forced to raise taxes in her autumn Budget.

“This represents the crystallisation of one of the risks that we highlighted around our central forecast,” Hughes said on Thursday.

He said that in a worst-case scenario where the US levied additional 20 percentage point tariffs across the world and the UK retaliated, “we would lose about 1 per cent of GDP at its peak”.

Hughes said that would weigh very heavily on growth next year — which the OBR has forecast would hit 1.9 per cent — and would lower growth in the medium term by 0.75 per cent.

“That kind of hit to the economy would also be a hit to revenues,” he told the BBC. “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.”

Cars make up about 10 per cent of Britain’s goods exports to the US.

Hughes warned that Reeves’ headroom was “a tiny fraction of the array of risks and shocks that could hit the UK economy in the next five years”.

He said that on top of tariffs there were risks to the UK’s domestic productivity outlook, a warning to the chancellor that the OBR might re-evaluate its consistently optimistic assessment of Britain’s growth potential.

“There’s a lot of uncertainty about recent figures and what they mean for UK growth and output for workers,” he said. “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.”

Hughes added that if interest rates rose by 0.6 per cent, it would be enough to wipe out that headroom. “It’s a very small margin to set aside against a set of fiscal objectives in a world which, as we’ve seen, can change from one day to the next.”

In her Spring Statement, Reeves announced a series of spending cuts, including a controversial £4.8bn reduction in welfare, to fill a £14bn hole in the public finances.

She ended the day with £9.9bn of headroom against her fiscal rule, exactly the same as she left herself in her October Budget, but very small by historical standards.

Many economists think she could be forced to raise taxes later in the year to put the public finances on a more stable footing and to “shockproof” them against the kind of Trump-related initiatives seen overnight.

Reeves’ “ironclad” fiscal rule means she must balance current spending with tax receipts by the end of the forecast period in 2029-30.

UK luxury car brands such as Jaguar Land Rover, Aston Martin and Bentley would be hit hard by the tariffs since they did not produce any cars in the US. 

Ian Henry, an automotive production expert who runs the AutoAnalysis consultancy, said some luxury brands such as Rolls-Royce and Bentley may have more flexibility to absorb the higher tariffs by cutting margins at dealers or by trying to reduce the cost when vehicles arrive in the US.