The United Kingdom, meanwhile, is girding itself for an impending economic calamity. The state government is currently addressing the reality of increased state taxes and impending new U.S. tariffs on imported goods. Chancellor Rachel Reeves deeply understands the looming fiscal crisis we’re all up against. This time, she believes, there is a real opportunity for our economy. The Institute for Fiscal Studies (IFS) has shone a light on the storm clouds gathering over the UK’s public finances. They warned that the Chancellor’s room for manoeuvre is severely restricted by continued global uncertainty.
President Donald Trump signaled that he might impose new U.S. tariffs. This would result in a 25% tariff on all cars and automotive components imported into the United States. This sudden action has raised fears of a deepening trade war. The proposals are still short of the doomsday worst case scenario the Office for Budget Responsibility (OBR) forecast. The OBR’s most pessimistic scenario envisages an increase of 1% on the negative effect on economic growth. The implications of this decline would be devastating to the UK economy.
“It is a tiny fraction of the risks to the outlook.” – Richard Hughes from the OBR
That’s the warning we’ve just received from OBR. Beyond the rhetoric, they are correct to say that such import taxes would hit goods accounting for about 0.2% of GDP directly. Although this figure seems modest, it is projected to have concrete impacts on our economy. As Paul Johnson of the IFS pointed out this morning, Chancellor Reeves is left with almost no fiscal headroom. This is deeply alarming in light of the overall shaky economic forecast.
“we can surely now expect six or seven months of speculation about what taxes might or might not be increased in the autumn” – Paul Johnson from the IFS
Despite these ominous clouds, Chancellor Reeves is undeterred. This is a sign that the UK economy still has some interesting “opportunities” as well as “risks,” the Chancellor revealed to BBC recently. Meanwhile, she has left open the door for tax hikes. Any proposed measures would need to be carefully weighed so they don’t stifle economic growth.
Second, the government is already imposing very deep cuts into welfare and civil service expenditures. Along with all that, they’re getting rid of a bunch of quangos, including NHS England. These measures form an overall package of intended measures to get a grip on public spending in the face of economic storm clouds gathering.
This is not the first time the OBR has reported out challenges. Chancellor Reeves does indeed still have at least £9.9 billion in headroom to fulfil her self-imposed fiscal rules. That figure is pretty much chicken feed compared to the £30 billion average headroom since 2010. It underscores the limited fiscal context that the Biden administration is working within.
“Non-defence spending can only be cut so far.” – Paul Dale, chief UK economist at Capital Economics
Faced with new global security threats, both the UK and Germany have pledged to raise their defence budgets. The war in Ukraine continues still too many years after President Trump promised to help make it stop.
A mere £10 billion doesn’t seem like very much. Against an economy with annual spending and income of close to £1 trillion, it is in fact a very small percentage. Even small changes can echo throughout the economy, overall slowing growth and damaging fiscal sustainability.