Donald Trump's threat of tariffs could knock percentage point off UK GDP as Reeves paints gloomy forecast for growth

26 March 2025, 20:09 | Updated: 26 March 2025, 20:20

Donald Trump's threatened tariffs could wipe out Rachel Reeves's headroom and knock a percentage point off GDP, the Office for Budget Responsibility has said.

In her Spring Statement earlier, Reeves admitted growth is now expected to be just 1% for the year, half of the OBR’s previous prediction.

The announcement came as Ms Reeves pinned the UK’s faltering economy on "increased global uncertainty".

The US president has repeatedly threatened to impose wide-ranging tariffs on foreign goods that could amount to 20% on British goods and come into effect next week.

In its economic forecast published on Wednesday, the OBR said the most "severe" scenario, in which the UK and other nations retaliated to the imposition of tariffs, would see GDP 0.6% lower than forecast this year and 1% lower next year.

This scenario would also "almost entirely eliminate" the Chancellor's £9.9 billion headroom against her fiscal rules, potentially forcing her to implement further spending cuts or tax rises.

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An alternative scenario, in which the UK does not retaliate, would see a smaller reduction in growth, with GDP 0.4% lower than expected this year and 0.6% lower next year.

But it is unclear whether this forecast means the Chancellor will resist pressure to retaliate against any American tariffs.

Talks between the UK and US on avoiding tariffs remain ongoing, with Trade Secretary Jonathan Reynolds visiting Washington last week to discuss an "economic deal".

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But Mr Reynolds was unable to secure an exemption for the UK from steel tariffs imposed by Mr Trump earlier in March.

The OBR added that even a more limited regime in which the US only increased tariffs on Chinese, Canadian and Mexican goods could see the UK economy 0.2% smaller than expected next year.

At a press conference on Wednesday, Rachel Reeves said the Government would continue to make the case for "free and open trade" with the Trump administration, warning that "increased tariffs between our economies will damage both our economies".

She added: "Let's see where we get to in the next few weeks."

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Ms Reeves also appeared to rule out changing the digital services tax in exchange for exemptions from the US tariffs regime.

Media reports have suggested such a move was under consideration as a way of appeasing Mr Trump, given its impact on major US tech firms including X, which is owned by top presidential adviser Elon Musk.

Asked about the digital services tax on Wednesday, Ms Reeves said: "We believe that companies should pay tax in the countries in which they operate, which is why we introduced a digital services tax in the first place - and our views on that have not changed."

Meanwhile, the Liberal Democrats accused Ms Reeves of "flying blind" into a trade war and urged the Government to secure a new trade deal with the EU so it could "deal with Trump from a position of strength".

Lib Dem Treasury spokeswoman Daisy Cooper said: "Trump's tariffs risk leaving the Chancellor's plans in tatters, wiping out what little growth was left after forecasts were slashed. But this Government is flying blind instead of coming up with a proper plan on how to protect our economy from this threat.

"Simply sitting back and hoping is not a strategy."