The Chancellor’s bid to boost economic growth and signal confidence to the markets in her Spring Statement could backfire within one week as Donald Trump’s escalatory tariff war looms.
The President has dubbed April 2, 2025 “Liberation Day”, which is when “reciprocal” tariffs will be slapped on countries with significant trade barriers against the United States.
With the EU in the crosshairs with a 25 per cent levy expected on goods, analysts fear the economic consequences will spill over into Britain.
These after-effects could be compounded by the President’s “secondary tariffs”, which he announced on Monday, imposing a 25 per cent levy on any country that buys oil or gas from Venezuela a 25pc fee on their trade with the US.
This poses a serious threat to Rachel Reeves as she plans to claw back some of the £9.9 billion fiscal headroom that has been wiped out since her Autumn budget.
Rachel Reeves’ tight fiscal margin has left her vulnerable to Donald Trump’s ‘Liberation Day’ tariffs
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How might Trump’s tariffs derail the Spring Statement?
The Chancellor has ruled out “tax and spend” policies, meaning she will neither raise taxes nor government spending in a last-ditch attempt to recover gains lost to sluggish growth and spiralling borrowing costs.
However, as Trump’s reciprocal tariffs will be aimed at countries that apply VAT to US imports, the UK’s 20 per cent VAT rate could cut our GDP growth by 0.4 per cent annually for two years — about £24 billion in lost growth, warns the National Institute of Economic and Social Research (Niesr).
For context, if the UK economy were anticipated to grow by 1.5 per cent in a given year, this reduction would lower growth to 1.1 per cent, representing a significant slowdown.
William Bain, head of trade policy at the British Chamber of Commerce, is calling on the UK Government to “adopt a flexible and agile response”, to avoid triggering a trade war, and to seek to negotiate “alternative arrangements”.
“If they do not, then sectors such as automotives, pharmaceuticals, and food and drink could be significantly hit as higher tariffs inevitably feed through into globally higher prices for consumers,” Bain warned.
On Monday, the Bank of England Governor Andrew Bailey warned these tariffs could compound Britain’s faltering productivity, already evident in manufacturing’s PMI drop to an 18-month low of 44.6.
This could render Reeves’ growth forecasts obsolete within a week, forcing her to pivot to damage control.
The BoE had already voted to hold interest rates at 4.5 per cent earlier in March, as policymakers warned that uncertainty over trade had intensified following new US tariffs.
Trump’s trade war could also spike UK borrowing costs as gilt yields often move in tandem with US Treasury yields due to the interconnectedness of global financial markets.
According to economists Ruth Gregory and Hubert de Barochez at Capital Economics, UK gilts may be trapped in a “vicious circle”, where rising US yields lead to higher UK yields, thereby increasing borrowing costs.
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Trump’s trade war could also spike UK borrowing costs as gilt yields often move in tandem with US Treasury yields
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Aberdeen fund manager Matt Amis highlights that a 10 basis point rise in US Treasury yields typically results in an eight basis point increase in UK gilt yields.
Trump’s hinted flexibility on some countries, for example pausing Mexico’s tariffs at the last minute, might pressure Reeves to concede on taxes like the £700million Digital Services Tax, which would catch American conglomerates in the net such as Amazon and Apple.
She recently hinted at offering Trump this sweetener as his escalatory tariffs loom.
Pressed on whether she would scrap the levy, Reeves told the BBC’s Sunday with Laura Kuenssberg: “Well, it’s the right thing that companies who operate in the UK pay their taxes in the UK and the United States government and tech companies understand that as well.
“But as I say, we are having discussions with the US.”
This could widen her fiscal hole, clashing with her self-imposed borrowing rules.
Trump’s secondary tariffs on Venezuela oil could also spike global energy costs, hitting UK consumers and contradicting Reeves’ consumer protection pledges, analysts fear.
