Trump's 'Liberation Day' Tariffs Could "Knock Out All" Of Rachel Reeves' Headroom
Donald Trump is expected to announce a number of large tariffs on Liberation Day
3 min read
Donald Trump's plan to impose tariffs on goods entering the US from the UK could "knock out" all of the government's fiscal headroom, the Office for Budget Responsibility said on Tuesday.
President Trump is expected on Wednesday to confirm details of tariffs on goods imported from countries around the world in what he describes as "liberation day".
London and Washington are currently in negotiations over a new economic deal, announced by Prime Minister Keir Starmer when he visited the White House in late February, which the UK government had hoped would persuade Trump to exclude the UK from his tariff plans.
However, those hopes now appear to be fading, with UK government sources expecting US tariffs on UK goods to take effect in the early hours of Thursday morning.
Starmer on Tuesday morning told the Cabinet that the government would take "a calm and pragmatic approach best served UK national interests, not a knee-jerk reaction".
Speaking to MPs of the Treasury select committee this morning, Professor David Miles, representing the independent OBR, said that if Trump imposed 20-25 per cent tariffs on the UK, it could "knock out all the headroom that the government currently has".
Fiscal "headroom" refers to the buffer the government has within its fiscal rules to increase spending.
At last week's Spring Statement, Chancellor Rachel Reeves said that the government would have lost its fiscal headroom, and breached its own fiscal rules as a result, had she not announced additional reductions to public spending in areas like welfare.
Reeves says her commitment to the fiscal rules is non-negotiable and "iron-clad".
However, the approach has attracted criticism, with the Institute for Government think tank writing in The House that it was "exactly the wrong way to be making complex policy changes".
The cuts to welfare also distressed many Labour MPs who felt that reductions already announced by Work and Pensions Secretary Liz Kendall had already gone too far.
The government's fiscal headroom stands at £9.9bn following the Spring Statement — the same as what it was heading into Reeves' speech last week.
However, the OBR's Miles warned that US tariffs could wipe it out entirely.
"If tariffs at 20-25 per cent were put on the UK, and maintained for five years, our assessment of what that does is that it will knock out all the headroom that the government currently has."
He said, however, that this assumption is "at the pessimistic end" of the spectrum as it is based on tariffs staying in place beyond the next US presidential election.
Miles also said that while uncertainty around trade policy was "not good news for anybody", a "very limited" trade war not involving the UK could end up having a small positive impact on the British economy if exporters overseas divert their goods to Britain.
"It wouldn't be unreasonable to think that if anything, that could be very, very mildly positive for the UK...
"Some of the exports from China, for example, that would have gone to the US, will be looking for a home for them in the rest of the world, and stuff will be available in the UK for a bit cheaper than it otherwise would have been."
But he added that it is "very hard to come up with an assessment of what the impact of government policy in the UK might be" as it changes "by the day".
