Trump tariffs could cut growth and wipe out Chancellor’s headroom, OBR warns

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.

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.

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”.

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.