Tax rises are “on the cards” as Britain’s economy is hit by Donald Trump’s tariffs trade war, says one of Britain’s most respected Whitehall experts.
Former Cabinet Secretary Lord O’Donnell also stressed that London and the South East would escape the full brunt of the US import levies impacting on the Midlands and North, where there is more manufacturing and car plants.
As the world was still reeling from Trump’’s wave of levies, Chancellor Rachel Reeves told the Commons that she "will be meeting US Treasury Secretary Scott Bessent shortly", with the 10% tariffs on the UK starting to bite.
Lord O’Donnell called for the UK to be the “champion of freer trade”, seeking a better deal with the European Union and other economic blocs, India and also the US.
He believes the Treasury will take stock in the autumn on the impact of Trump’s trade war on the UK economy and its public finances.
“Taxes up in September, that has got to be on the cards,” he said.
“That’s got to be a real possibility if you don’t want to cut public spending even more.
“Hopefully, they can do that in a more pro-growth way.”
The economic “world order” was changing, with “a very uncertain US” turning its back on liberal trade, he added.
“It’s bad that we are going into a trade war, world prosperity has been driven by trade for decades, centuries even,” he explained.
“We are all going to be poorer,” he added, with the world threatening to plunge into a full-blown trade war as China threatens to fight US tariffs “to the end”.
The Cross Bench peer emphasised that the “direct impact” of Trump’s tariffs on the UK would be quite small as two thirds of exports to America are services rather than goods which will be affected by the 10% levy.
But he warned of the “indirect” effects as economies around the world are left battered by Trump’s tariffs.
“Growth will fall globally and that will be bad for our exporters,” he told BBC radio.
The US president has imposed 25 per cent tariffs on cars, raising fears of 25,000 job losses in the UK, as well as on steel.
“That will create real problems in the Midlands and the North,” said Lord O’Donnell.
“For London and the South East, very services based, it won’t be much of a problem at all.”
He added that the tariffs would worsen regional imbalances in the UK, so the Government was right to try to prop up hit industries and communities.
Trade diversion could also push down prices as China and other countries seek new markets for goods they are unable to sell in America.
But trillions have been wiped off the value of shares in recent days as stock markets have tumbled.
Downing Street resisted calls for a “buy British” campaign in light of US tariffs.
Ms Reeves warned against the UK becoming “inward looking” as she faced calls in the Commons to encourage the public to buy more British goods and produce.
The Government has so far not retaliated against Trump’s import levies, instead trying to strike a trade agreement to avoid them or lessen their impact.
The European Union, while being prepared to hit back, is also seeking to stop the world being plunged into an all-out trade war.
