Rachel Reeves says she will not change her fiscal rules as borrowing costs rise again
Spending plans pencilled in for June could be brought forward in order to boost growth and protect the economy from the turmoil sparked by Donald Trump’s tariffs.
The i Paper understands that ministers are considering speeding up announcements sketched in for the Spending Review in June, where Government departments have been able to finalise deals with the Treasury.
Although Donald Trump on Wednesday paused most tariffs for 90-days in a shock announcement that succeeded in reversing a global stock market decline, the position for the UK hasn’t changed.
This is because the US President retained a 10 per cent base line tariff on all nations – the level the UK was already at. And 25 per cent tariffs on steel and cars also remain.
And with 125 per cent tariffs on China remaining and Trump impossible to predict, concerns over a global recession remain.
Prime Minister Keir Starmer spoke on Wednesday of the need to go “further and faster” on growth, amid warnings that Trump’s trade war could wipe out Rachel Reeves’s room for manoeuvre in the autumn Budget, and force her to choose once again between raising taxes or cutting spending to balance the books.
The Prime Minister’s announcement on Monday that he would relax the ban on new petrol cars after 2030 was a move that whad been in the pipeline. However, it was hastened in response to US tariffs.
Ministers are considering similar moves with announcements surrounding the Spending Review, as they look to boost growth to generate cash for the public finances, rather than watering down the Government’s fiscal rule of balancing spending with tax and other revenue within three years.
The Government is understood to be looking at protecting three key UK industries from the worst effects of the tariffs: cars, steel and pharmaceuticals.
With Britain’s last remaining steel blast furnaces in Scunthorpe under threat, ministers have not ruled out nationalisation, saying all options remain on the table.
And while Donald Trump has not yet placed tariffs on the pharmaceutical industry, he has stated his intention of doing so – sending shares in the UK’s biggest drug manufacturers, AstraZeneca and GSK, tumbling.
While nothing has been decided, options open to the Government would include subsidies and reducing red tape for such companies, especially for research.
As well as boosting growth, ministers will focus on striking an economic deal with the United States to reduce tariffs.
Economists warned that Reeves was once again under severe pressure on the public finances in the wake of Trump’s tariffs. UK borrowing costs rose to their highest since 1998 on Wednesday, almost halving her £9.9bn headroom, or emergency fund, which had only been restored in March, to £5.2bn.
Alex Kerr, UK economist at Capital Economics, said: “Based on the rise in gilt yields and the fall in interest rate expectations, the Chancellor’s headroom against her fiscal rule has fallen from £9.9bn at the Spring Statement to £5.2bn.
“There are other moving parts, including possible downward revisions to the OBR’s [Office for Budget Responsibility’s] GDP forecasts, and a lot of time [between now and the Autumn Budget], but the rise in gilt yields underlines just how fragile the Chancellor’s restored buffer is to economic developments.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Already growth forecasts had been slashed in half this year, and the tariff storm is set to weigh on the UK economy. It’s highly likely that the economy will slow back to a crawl and there is a risk it could go into reverse, given the maelstrom of worry taking hold.
“The Government is relying on growth to make its sums add up. It needs a healthy economy to bring in enough tax revenue to stay within its fiscal rules. If the economy slows sharply and potentially starts shrinking, it could open up a new black hole in the public sector finances. It would then mean either borrowing more and breaking the rules, spending less, or raising taxes.”
There have been calls in recent days to relax the fiscal rule – which states day-to-day expenditure must come from tax receipts rather than borrowing – in the wake of Trump’s tariffs and rising borrowing costs, but Starmer and Reeves have insisted that the commitment is “ironclad” and crucial to ensuring economic stability.
Starmer told ITV’s Peston on Wednesday: “The fiscal rules were put in for a purpose, they’re ironclad, they’re non-negotiable.
“The fiscal rules of this Government are non-negotiable for a simple reason. Stability is absolutely essential to give families and businesses certainty. We saw what happened when the previous government lost control of the public finances. So we will stick to those fiscal rules as we did when I delivered the Spring Statement just two weeks ago.
“We will always act in our country’s national interest for jobs and to support British business.”
The Chancellor also said, in an interview with The Financial Times, that the global turmoil strengthened the case for a swift post-Brexit reset deal with the EU.