The Office for Budget Responsibility (OBR) has warned that Chancellor Rachel Reeves will hike up taxes if US President Donald Trump imposes tariffs tomorrow.
Donald Trump is expected to confirm details of his "Liberation Day" tariffs on Wednesday, with UK goods likely to face new barriers when entering the US market from early Thursday morning.
The UK government has been in negotiations with Washington over a new economic deal, announced during Prime Minister Keir Starmer's White House visit in February.
Ministers had hoped these talks would secure Britain an exemption from Trump's global tariff plans.
The UK government has been in negotiations with Washington over a new economic deal
REUTERS
However, government sources now indicate these hopes are fading despite diplomatic efforts.
The OBR warned on Tuesday that Trump's tariffs could have severe consequences for the UK economy.
Professor David Miles, representing the independent OBR, told MPs that if Trump imposed 20-25 per cent tariffs on the UK, it could "knock out all the headroom that the government currently has".
This stark assessment applies if the tariffs were maintained for five years.
MORE LIKE THIS:
The government's fiscal headroom currently stands at £9.9billion following last week's Spring Statement.
Fiscal "headroom" refers to the buffer the government has within its fiscal rules to increase spending.
Chancellor Rachel Reeves has described her commitment to these fiscal rules as "non-negotiable" and "iron-clad".
At last week's Spring Statement, Reeves said the government would have lost its fiscal headroom, and breached its own fiscal rules, had she not announced additional reductions to public spending in areas like welfare.
These cuts have attracted criticism, with the Institute for Government describing it as "exactly the wrong way to be making complex policy changes".
Many Labour MPs were also distressed by the welfare reductions. The Prime Minister addressed the tariff threat during Tuesday morning's Cabinet meeting.
He told ministers the government would take "a calm and pragmatic approach best served UK national interests, not a knee-jerk reaction".
The diplomatic efforts continue despite diminishing hopes of securing an exemption before Trump's expected announcement.
Chancellor Rachel Reeves has described her commitment to these fiscal rules as 'non-negotiable' and 'iron-clad'
PAUK officials are preparing for the possibility of US tariffs taking effect within days.
Professor Miles noted that while uncertainty around trade policy was "not good news for anybody", there could be unexpected outcomes.
He suggested a "very limited" trade war not involving the UK might actually have a small positive impact on the British economy.
"Some of the exports from China, for example, that would have gone to the US, will be looking for a home for them in the rest of the world, and stuff will be available in the UK for a bit cheaper," he explained.
However, Miles added that it remains "very hard" to assess potential impacts as policy changes "by the day".
