While it is difficult to see how the United States’ President’s trade war will play out, it is already creating a number of economic headaches for Sir Keir Starmer at a time when Britain’s economy was already stuttering.
The plunge in global equity markets triggered by Trump’s tariffs is believed to have wiped billions of pounds off the value of pension pots, which are typically invested in stocks and shares.
That might be putting off home extensions, big new purchases or less money for grandchildren’s university; all of which could have knock effects for people’s families and for the wider economy.
ISA plan in disarray
But with stock markets in freefall, Reeves is being urged by economists to rethink her plans as it will force savers to take risks with their money at a time of major uncertainty
British firms exported £182bn-worth of goods to the US last year. They are all now being hit by 10 per cent tariffs from Donald Trump, when those products enter the US.
And some sectors are being hit even harder.
Steel and aluminium are also facing higher 25 per cent tariffs, adding to the pressure on the UK’s domestic steelmaking which was already hanging by a thread after years of decline, as well as defence exports to America.
According to analysis from Deutsche Bank, Trump’s tariffs will put between 50,000 and 100,000 people out of a job in the UK.
Flooding the market with cheap goods may bring down prices for British consumers, at least in the short term, but it threatens to undercut UK businesses which could reduce profit margins and put more jobs in affected industries at risk.
Spending cuts
This threatens to wipe out the so-called “headroom” – or spare cash – Reeves has available to meet her fiscal rule on controlling Government borrowing.
More cuts to Whitehall spending and benefits – many of which go to people in work – are likely to hit those already struggling to make ends meet and who are relying on increasingly stretched public services.
Experts have explained that the best way to do this while protecting fragile economic growth would be by raising the basic rate of income tax or hiking VAT. But hitting people’s wallets in such a direct way could be politically difficult for a party which pledged not to raise taxes for working people.
But Reeves has refused to rule out extending the freeze on income tax thresholds beyond 2028, despite having in October committed to ending it, which rasies the prospect of more people being pulled into paying higher rates of tax as their wages rise in the coming years.
However, having already grabbed some of the low hanging fiscal fruit by raising employers’ national insurance and capital gains tax, she may be forced to come up with alternatives.
Inflation
This could add to the cost of living crisis as Britons already face rising bills for energy, water and council tax this month.
The “dumping” of goods in the UK that overseas exporters are no longer able to send to the US, while bad for British firms, could also bring prices down.
This could mean the Bank of England reduces interest rates more quickly, bringing down mortgage costs.
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