Britain wants to appease Trump. Doing so will spell disaster for Reeves

Yahoo

02-04-2025

Sir Keir Starmer has accepted he will not be able to stop new US tariffs hitting Britain but the Prime Minister is holding out hope he can still convince Donald Trump to give the UK concessions after the fact.
How can he make the US president happy? Trump's grievances are many and varied – but there are steps Sir Keir could take to try to placate him.
However, concessions come at a cost. Softening UK tariffs or axing taxes on US goods and services would please Trump but would also risk blowing a hole in Rachel Reeves's finely balanced budget.
Trump's biggest bugbear is trade imbalances between the US and other nations.
Trade in goods between the US and UK is relatively balanced, with the UK running a small £2bn surplus over the last 12 months.
Tariffs are also relatively balanced, with Britain generally charging lower taxes on the import of manufactured goods but higher charges on agricultural products.
Nonetheless, Trump has pointed to car tariffs as an example of unfair treatment.
Britain taxes US cars at 10pc, in a hangover from our days in the EU. America only levies a 2.5pc tariff on vehicles made in Britain.
Similarly, America charges $88 (£68) on every 1,000kg of imported chicken but Britain's taxes on poultry start at £135.57 for the same quantity.
Sir Keir could offer to cut those higher tariffs to US levels, or even scrap them altogether.
The loss to the Exchequer would not be insurmountable: taxes on US imports accounted for £530m of the Treasury's £5bn haul from customs duties, according to the UK Trade Policy Observatory.
However, surrendering this revenue to placate Trump might be easier said than done.
Global trading rules mean Britain couldn't give the US a sweetheart deal without offering it to the rest of the world.
'Unless you do a deep trade deal, any tariff reduction you offer to any partner has to be offered to everyone else,' says Gregory Thwaites, economist at the Resolution Foundation.
If Sir Keir were to offer a global reduction, the Treasury would lose far more money, potentially blowing a big hole in Reeves's £9.9bn of fiscal headroom.
Other taxes have also attracted Trump's rage. He sees the digital services tax and the Biden-backed global minimum corporation tax as discriminatory against American businesses.
Sir Keir has already offered concessions on the digital service tax, but axing it entirely would mean foregoing an estimated £1.2bn in tax revenue by 2029-2030. Minimum corporation tax, meanwhile, is forecast to raise £1.2bn for the Exchequer in 2029-2030.
Taken together, axing these charges would cost the Treasury £2.4bn – vital headroom needed by Reeves in the context of her next budget.
Then comes VAT, which is charged at 20pc in Britain. The Trump administration argues this is a barrier to trade, a position few tax experts or economists agree with.
VAT is on track to raise more than £200bn for the Government, so it cannot simply be scrapped. Carve outs for American imports would make US-made goods artificially cheap compared to those made at home and would be difficult to administer in practice.
Even if Sir Keir doesn't surrender tax revenue to please Trump, economists say Reeves faces a black hole in the public finances by the autumn. That is because the president's blizzard of tariffs are expected to be bad for the global economy and may well trigger a recession.
'I think one could be fairly confident that it's not good news for anybody, frankly,' David Miles at the Office for Budget Responsibility (OBR) warned earlier this week.
Allan Monks at JP Morgan says: 'Even if the UK avoids tariffs, recession risks are rising. Employment prospects have already weakened as businesses adjust to higher domestic taxes. Our GDP forecast has already been lowered by 0.3pc due to increased trade uncertainty. This impact would likely increase and come alongside a broader negative hit to global growth if large-scale tariffs are maintained.'
He adds that Reeves's 'wafer thin headroom' means global instability will 'increase the pressure to raise new tax revenue at the autumn Budget'.
The Chancellor refused to rule out further tax rises when pressed by MPs on Wednesday.
The OBR warned last week that blanket tariffs would wipe out Reeves's headroom regardless of whether Britain retaliates with its own tariffs.
It estimated blanket US tariffs of 20pc on global imports would shave 0.4pc off growth this year and 0.2pc next year, while inflation would be higher. Speculation is mounting that the Chancellor may be forced into an emergency budget if the trade war ramps up.
It's worth noting that Reeves has beefed up the powers of the OBR, meaning any significant action on tariffs or support for the economy could force a snap verdict on the health of the economy. It is likely to be unflattering.
The Chancellor's 'fiscal lock' requires the watchdog to cost measures that it believes are 'fiscally significant', even if made outside a Budget. Any measure – or combination of measures – that the Government announces worth roughly £27bn or more has to be scrutinised.
While it is unlikely that any package to appease Trump would hit this ceiling, she will also be unable to announce a big support package without fresh OBR forecasts.
However, she does have a get out of jail free card.
The OBR's Charter for Budget Responsibility states: 'In the event of an emergency, or a significant negative economic shock to the UK economy, the Chancellor of the Exchequer may temporarily suspend the fiscal mandate and supplementary targets.'
In other words, if it gets really bad, she can throw the rules out of the window.
Andrew Wishart, senior economist at Berenberg, says an emergency budget is 'unlikely'. He says: 'Ultimately Reeves's fiscal target is for 2029-2030. Would she react to missing her borrowing goals by £10bn, £20bn or even £30bn before a Budget? I don't think so.'
Regardless, it seems likely that Trump will blow up the Chancellor's budget one way or another. The unanswered question remains: Will concessions be enough to win carve-outs for the UK? And if so, how high a price will Britain have to pay?
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