Donald Trump will deal Rachel Reeves a huge blow if he acts on a threat to impose tariffs on the UK next week. The Office for Budget Responsibility (OBR) halved its growth forecast for this year after the Chancellor announced £14billion in cuts to fix the public finances in her Spring Statement on Wednesday (March 26). The OBR warned of a 50% chance Ms Reeves would be forced to make more cuts or tax rises as early as October should the state of the economy get worse. It said US tariffs of 20% on UK exports would wipe 0.6% from GDP growth by 2026.

If the UK were to retaliate with tariffs on US exports, then this increases to one percent of GDP. The budget watchdog warned that Ms Reeves’s decision to maintain a “tiny” cushion of £9.9bn would mean minor changes to the economy could wipe out her fiscal headroom. This could be through Trump’s tariffs, increased borrowing costs or worsening productivity.

Mr Trump said on Wednesday he was placing 25% tariffs on car imports in a move the White House claimed would boost domestic manufacturing, but could also put a financial squeeze on carmakers which depend on global supply chains. The tariff starting in April means carmakers could face higher costs and lower sales, though Mr Trump argues they will lead to more factories opening in the United States and the end of what he judges to be a “ridiculous” supply chain in which car parts and finished vehicles are manufactured across the US, Canada and Mexico. To underline his seriousness over the tariffs directive he signed, Mr Trump said: “This is permanent.”

The US is Britain’s second largest car export market after the EU. The UK exported over 101,000 units in 2024, equating to £7.6bn of mainly high end luxury cars. Talks between London and Washington on avoiding tariffs remain ongoing, with Trade Secretary Jonathan Reynolds visiting the US last week to discuss an “economic deal”.

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.

Ms Reeves told reporters on Wednesday that the Government would continue to make the case for “free and open trade” with the Trump administration, warning “increased tariffs between our economies will damage both our economies”.

She added: “Let’s see where we get to in the next few weeks.”

The Chancellor also appeared to rule out changing the digital services tax in exchange for exemptions from the US tariffs regime. Media reports have suggested such a move was under consideration as a way of appeasing Mr Trump, given its impact on major US tech firms including X, which is owned by top presidential adviser Elon Musk.

Asked about the digital services tax on Wednesday, Ms Reeves said: “We believe companies should pay tax in the countries in which they operate, which is why we introduced a digital services tax in the first place – and our views on that have not changed.”

Meanwhile, the Liberal Democrats accused Ms Reeves of “flying blind” into a trade war and urged the Government to secure a new trade deal with the EU so it could “deal with Trump from a position of strength”.

Lib Dem Treasury spokeswoman Daisy Cooper said: “Trump’s tariffs risk leaving the Chancellor’s plans in tatters, wiping out what little growth was left after forecasts were slashed. But this Government is flying blind instead of coming up with a proper plan on how to protect our economy from this threat. Simply sitting back and hoping is not a strategy.”

Shadow Chancellor Mel Stride said earlier today (March 27) that Ms Reeves hasn’t left the economy “enough headroom” to withstand a potential “world trade war”.

Asked about external factors impacting the economy, including the war in Ukraine and the new 25% tariffs on imported vehicles, Mr Stride told ITV’s Good Morning Britain: “The bottom line is that if you have a chancellor that cannot grow the economy, cannot make decisions on tax and borrowing and spending, then you end up in the situation where we’re in where we still don’t really have enough headroom to withstand what might be coming down the line.

“If we have a world trade war, that headroom that Rachel Reeves rebuilt yesterday because she burned through all the last headroom, I’m afraid, will just not be sufficient. She should have had us in a stronger position, so that she had more headroom, more resilience in the economy to withstand these things.”