152. Liberation Day: Will Trump’s Tariffs Kill Reeves’ Growth?
Apr 2, 2025
auto_awesome
In this discussion, Richard Hughes, Head of the Office for Budget Responsibility, shares insights on the potential economic fallout from Donald Trump's tariffs. He evaluates the influence of the OBR on government policies and how it might hinder growth, while Rachel Reeves' fiscal 'headroom' could quickly diminish. Their conversation dives into the unpredictable nature of economic forecasting amid global constraints, the pressing need for sustainable investment, and the implications for the UK’s fiscal health.
The potential imposition of US tariffs is predicted to decrease UK economic output significantly, highlighting the UK's vulnerability in global trade.
The Chancellor faces a precarious fiscal situation with minimal headroom, risking tax increases or spending cuts that could destabilize the economy.
Future public debt in the UK is projected to rise unsustainably due to demographic challenges, necessitating urgent reforms in tax and spending policies.
Deep dives
Monzo Business Partnership
Monzo Business is collaborating with The Rest is Money, showcasing its various banking plans tailored for different business sizes in the UK. The Pro version, aimed at small teams, offers tools to streamline financial management, while the Light plan caters to sole traders and the Team plan supports growing businesses. This partnership not only emphasizes the accessibility of Monzo Business accounts for over 500,000 businesses but also highlights how the bank aids small businesses across the country. Interested parties, specifically sole traders and limited company directors in the UK, are encouraged to sign up.
Impact of US Tariffs on UK Economy
The discussion delves into the UK's economic vulnerability related to potential US tariffs. Scenarios were analyzed, including unilateral 20% tariffs imposed by the US versus retaliatory actions by other countries, predicting significant reductions in UK output. The forecast suggests a 0.6% decrease in output under a unilateral tariff scenario and up to a 1% decline when retaliation is considered, marking a permanent loss for the UK economy. Even though the direct impact seems relatively small compared to other economies deeply integrated with US goods, the indirect consequences could significantly affect UK trade with major partners like the EU.
Chancellor's Fiscal Headroom Risks
The conversation highlights the precarious fiscal situation facing the Chancellor, noting a mere £10 billion in headroom against a £3 trillion economy. This amount is deemed insufficient when accounting for minor forecast variations impacting tax revenue and spending. Risks to fiscal targets are amplified, with only a 54% probability of meeting them, representing one of the lowest projections observed. The discussion implies that, if conditions worsen, the Chancellor may be forced into tax increases or spending cuts, jeopardizing economic stability.
Long-Term Economic Projections
The discussion covers the findings of the Fiscal Risks and Sustainability Report, projecting the UK's public debt trajectory over the next 50 years. Currently at around 100% of GDP, the debt is projected to surge to approximately 270% by 2070, primarily due to rising health and pension spending amidst an aging population. This unsustainable increase necessitates reforms to tax and spending policies, raising crucial questions about the future fiscal landscape. The analysis draws attention to the need for immediate actions to stabilize finances before being overwhelmed by future demographic challenges.
Challenges in Economic Forecasting
The complexities of economic forecasting in a volatile environment are addressed, given recent shocks like COVID-19 and the energy crisis. The speaker emphasizes the necessity of producing a central forecast in spite of significant uncertainties. Despite the challenges, the Office for Budget Responsibility (OBR) has indicated the importance of understanding fiscal risks and sustainability, advocating for a long-term view on economic policies. The focus on long-term stability is essential, as it juxtaposes the immediate policy responses that often cater to short-term crises, suggesting that fundamental reforms are required to achieve sustainable growth.
Steph and Robert speak to Richard Hughes, head of the Office for Budget Responsibility, who has run scenarios on what will happen to the economy as Donald Trump imposes tariffs and the world responds. He also discusses whether the OBR has too much influence over government and stultifies growth, and how Rachel Reeves’ fiscal “headroom” may be wiped out again very shortly.
