As Rachel Reeves delivered her spring statement on Wednesday, proclaiming that she was “restoring stability to the public finances,” but many in the House of Commons appeared uncertain about how to react.
Reeves’s assertions did not align with the prevailing mood of uncertainty and concern, both at home and internationally. Some Labour MPs nodded in agreement, seemingly eager to impress the whips, while others in the government benches looked somber. This year’s growth forecasts had been reduced by half, necessitating new revenue to comply with the chancellor’s fiscal regulations, placing the greatest burden on the most vulnerable.
Multiple Labour MPs approached by the Observer on Wednesday afternoon declined to elaborate on the spring statement, which they would typically support. “Sorry. Better not say,” one stated hurriedly. One of the few who did offer a comment remarked that it seemed more like a return to austerity rather than a pathway to stability.
Throughout the rather perplexing atmosphere in the Commons, the chancellor highlighted some positives. The minimum wage was set to rise, and interest rates had already decreased. Reeves promoted slogans about a government “not stepping back, but stepping up.”
Yet, at the core of her argument was a contradiction that she seemed unwilling to confront directly, even if she couldn’t completely overlook it. Mid-speech, Reeves briefly noted that the global economy had become “more uncertain… as trading patterns become more unstable,” without addressing who was responsible for that instability.
The Office for Budget Responsibility (OBR), in its report accompanying the spring statement, unveiled the challenges and the unspoken truth. In a section labeled “risks and uncertainties,” the OBR warned that if the United States were to initiate a trade war next week “with a reciprocal 20 percentage point increase in tariffs between the US and the rest of the world” (which is not an unlikely scenario), UK GDP would be 1% lower than their latest forecast. They added that, with stark clarity, the consequence would be to “completely eliminate” the effects of the savings Reeves had just announced, necessitating her to return soon to find additional revenue, likely through tax increases.
Donald Trump’s imposition of tariffs seems likely to trigger retaliation. Photograph: Evelyn Hockstein/Reuters
No official in the UK or any other nation trading with the US denies the alarming reality when speaking privately. High-ranking officials here and in Europe know that no matter what measures they take to protect their economies from global instabilities, Donald Trump can potentially disrupt those plans without warning.
In European capitals and Brussels, as here, preparations are underway for the worst. A recent startling leak of confidential military plans regarding recent US actions against the Houthi armed group in Yemen has further highlighted the chaotic unpredictability of the Trump administration.
João Vale de Almeida, former EU ambassador to the US and UK and author of the new book The Divorce of Nations, advised that everyone should brace for a trade war. “If it looks like a duck and quacks like a duck, then it probably is a duck. If the threat of tariffs appears coercive, it likely is coercive. And if that’s the case, then we should not be surprised if the EU reacts accordingly, utilizing its anti-coercion tools. It’s regrettable, but this is the course President Trump’s attitude is steering us towards. Unfortunately.”
The day following Reeves’s statement, Trump began to wield his influence, announcing a 25% import tariff on vehicles, including those from the UK. On Friday morning, UK car industry leaders met with industry minister Sarah Jones, conveying that this latest action compounded existing pressures such as the zero-emissions vehicle mandate. The French automotive association, Plateforme Automobile, expressed “grave concern,” stating that “everyone will lose” from a trade war, which “could not come at a more unfortunate time for Europe.” Approximately 10% of all European car exports are destined for the US: 700,000 vehicles last year. The majority are premium models, and German manufacturers like Porsche, Audi, BMW, and Mercedes are likely to be hit harder than their French counterparts. A downturn in German growth will have ripple effects for all its neighbors.
Across the globe, individual trade disputes are flaring up, raising fears among experts that they could be the beginnings of a larger global conflict.
Additional Trump tariffs are expected to be announced soon, on a day the US president has dubbed “liberation day.” Of particular concern for the UK is the potential for him to target more key UK exports to the US, including pharmaceuticals.
Behind the scenes, while domestic political controversies have swirled around Reeves’s cuts to benefits, including those affecting disabled individuals, much of the government’s intense work over recent weeks has been focused not at home but in Washington.
The pressure builds: demonstrators outside the Treasury last week calling on Rachel Reeves to raise taxes on the wealthiest. Photograph: Wiktor Szymanowicz/Future Publishing/Getty Images
After business secretary Jonathan Reynolds met with US commerce secretary Howard Lutnick and Trump’s trade representative Jamieson Greer in Washington 10 days ago, he left a team of UK officials behind to continue urgent discussions and negotiations on a trade deal, together with the ambassador to Washington, Peter Mandelson. “There is still hope for an economic trade deal to avert tariffs,” shared one government insider. “But we simply don’t know. It’s unpredictable. We must be present and do what we can.”
The challenge lies in the fact that every other country trading with the US is lobbying Trump’s administration with equal vigor. William Bain, head of trade policy at the British Chambers of Commerce, describes the situation as “a negotiation like no other,” marked by its scale and unpredictability. Some worry the UK could appear weak and submissive if it fails to secure a better deal than the EU, especially having consistently refrained from criticizing Trump’s comments on trade or international relations since his inauguration.
Sam Lowe, a notable European trade expert offering advice to government officials and ministers, summarized: “Next week is a significant moment for the UK government. If on ‘liberation day’ Trump imposes no additional tariffs, or lowers tariffs compared to those on the EU, it will validate the current approach of engaging positively with the Trump administration while prioritizing negotiations over confrontations. Conversely, if the UK is subjected to tariffs akin to those imposed on countries that have taken a tougher stance, the government may need to reconsider its strategy.”
The US has announced a 25% tariff on car imports, including from the UK. Photograph: Christopher Furlong/Getty Images
Lowe himself was uncertain about what outcome ministers might anticipate: “There are also questions about whether the existing tariffs on steel/aluminium and cars may be reduced or removed. The UK hopes to achieve some progress, but to date, requests for better treatment have been unavailing.”
John Springford, an associate fellow at the Centre for European Reform, cautioned that the economic risks cannot be understated. “If Trump enacts a 25% tariff on cars and car parts from the UK, it will diminish exports to the US, but only £7bn of exports would be impacted from a total of £800bn. The far graver costs would stem from a booming global trade war, even if the UK refrains from retaliation. The ramifications of a global trade war would lead to stagflation in the UK. US inflation would surge, and the Federal Reserve would slow interest rate cuts, which would tend to keep UK rates elevated. Increased trade barriers would weaken demand in the EU and the US, adversely affecting British exports.” One potential strategy the UK is contemplating to dissuade Trump is reducing its digital services tax designed to recapture corporate tax from Big Tech firms that evade taxes by locating in low-tax areas such as Ireland.
The US is also insisting on the reduction of VAT, which is applied across Europe on US imports. However, complications arise, as Springford indicates: “If the UK eliminated VAT for the US, it would provide a subsidy to US exporters compared to UK producers, since VAT is also applied to British goods consumed domestically. This would incur significant costs. It could also breach WTO regulations if only US imports were exempt from VAT while others were not.”
Another option, which Starmer has been hesitant to explore thus far, is to confront Trump. Canada’s new prime minister, Mark Carney – former Bank of England governor – has centered his election campaign on opposing the US president. On Thursday, he cautioned that Canada would reassess its relationship with the US, as it is “no longer a stable partner.”
Following the first phone call between Trump and Carney the next day, the US president, who had previously dismissed Canada as the “51st state,” noticeably softened his tone, describing the conversation on social media as “extremely productive. We agree on many matters.” Trump later added: “I believe things will unfold very favorably between Canada and the United States.”
Mood of uncertainty … tinned produce at the Trussell Trust Foodbank. Photograph: Jonathan Brady/PA
As next Wednesday approaches, Downing Street remains cautious. Starmer is reportedly determined to respond to whatever Trump does while acting “in the national interest,” which may imply retaliation as the EU is expected to do. However, there are also indications from the government suggesting that he may not immediately view Wednesday as a trigger for decisive action but might permit more time to negotiate with Trump.
Even in the absence of Trump’s tariffs, the OBR predicts “weak growth in imports and exports over the medium term,” attributing this largely to Brexit’s repercussions.
Moreover, starting on 6 April, the increase in employers’ national insurance set out last October will take effect, impacting businesses that warn of serious consequences for their ability to hire personnel. According to the OBR, in the upcoming June spending review, all governmental departments, aside from health, defense, and education, will experience real-term cuts of 0.8 percent.
In conclusion of her spring statement, Reeves asserted that what “drives this government” is “delivering security for our country and security for working people.”
While that may be the intention, her commitment to organize the public finances, no matter how tough it may be, has sparked dissatisfaction within the Labour party. However, arguably the larger discussion this weekend should revolve around how much control she truly possesses.
