'No more room for manoeuvre': Don't react to Trump's tariffs with more cuts to benefits, Labour warned

Donald Trump’s tariffs may pile “intense” fiscal pressure on the UK government – but more cuts to public services are not the answer, economists say.

The US president on Wednesday (2 April) slapped a 10% tax on UK exports to the United States, part of a bevy of ‘liberation day’ tariffs that have sent world leaders scrambling.

This is the lowest rate doled out by the president – but with UK businesses exporting over £60bn in goods to the US every year, it could still decimate our growth prospects.

For chancellor Rachel Reeves, the fee is “not good news by any means”, said Marley Morris, associate director for trade at IPPR think tank. The EU and many other countries have already announced reciprocal tariffs, increasing the likelihood of a trade war.

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“I think it’s almost inevitable now that there is going to be significant retaliation, in effect, a global trade war that will have broader economic impact,” he told Big Issue. “That will have an impact on UK growth, It will impact borrowing costs. This will put fiscal pressure on the UK at a time when finances are already very tight for the government.”

The government was already staring down a bleak economic forecast, with stalling growth threatening to evaporate fiscal headroom. With such dire projections, the chancellor opted to axe £4.8bn from disability welfare and reduce government spending – decisions she described as unavoidable.

But the ‘liberation tariffs’ could evaporate these hard-fought savings, which experts warned came at the expense of ‘millions’ of vulnerable people. The Office for Budget Responsibility has predicted a GDP decline of 0.6% this year and 1% next year, if the government reacts with retaliatory measures.

How bad will the impact be? “It’s hard to say at this point,” says Morris. But more cuts are not the answer.

“There’s still a few months before the October budget for this to play out and [for the government] to see what the broader economic and fiscal impacts are. But I think we saw from the OBR that there are likely to be quite a significant impact. So it could well mean that the fiscal position changes again, and that there are further pressures on the chancellor.”

“The best way of dealing with what is an extremely difficult situation may be to consider some of the options around tax rises, rather than going further on spending and welfare cuts where there isn’t really much more room to manouver.”

Last week, economists told the Big Issue that a 2% tax on assets more than £10 million could raise up to £24bn a year.

“Over a decade of austerity has already stripped away support for the most marginalised, and it’s simply a choice that the government did not need to make,” Caitlin Boswell from Tax Justice told Big Issue.

At this point, government negotiators will be gritting their teeth and hoping to avoid tax increases or further cuts.

There is still much to play for. The UK will look to carve out exemptions to the tariffs – a negotiation that could leave them in a comparably favourable position. Nonetheless, the government yesterday (3 April) launched a consultation with business on possible retaliatory tariffs. A trade deal is a better option, said Morris – but the government is right to rule nothing out.

“I think obviously the UK wants to do a deal with the US, and I assume that there has been some progress in negotiations. It’s not clear exactly what that will mean in terms of the benefit for UK-US trade. Would it mean that this 10% tariff is lifted? Will it mean other forms of trade liberalisation? It’s not totally clear, but I think, in our view, that there needs to be a balance here. So, yes, the UK should pursue a trade deal. But at the same time, it should also consider – if there isn’t going to be a deal forthcoming – taking retaliatory measures itself.

“You don’t want to create a kind of cycle of impact where the trade war escalates. But at the same time, it’s important, I think, in the context of these negotiations, to not appear weak.”

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