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The UK is “in a very strong position” to withstand new shocks to the public finances without further tax increases, Rachel Reeves said as she pledged to strengthen trade ties around the world in the face of US tariff threats.
Speaking in Davos on Tuesday, Britain’s chancellor told an event hosted by Bloomberg that by doubling her “headroom” against her fiscal rules in November’s Budget, she had “given greater confidence to people that we can have stability on a fiscal front”.
After a year in which policy U-turns, adverse market movements and sticky inflation forced Reeves to backtrack on previous pledges and deliver a second tax-raising Budget, the chancellor is keen to quash speculation that her fiscal plans are already coming under strain due to a drop in net migration to the UK and the potential impact of new tariffs.
The fiscal consolidation announced in November had the IMF’s stamp of approval as the fastest in any G7 country, she argued, and “puts us in a very strong position that we will not need to do more on that front”.
“We’re really clear that the spring forecast from the [Office for Budget Responsibility] will not be a fiscal event in the same way that it has been in the past,” she added.
“We don’t plan any tax changes in the spring, and very much hope that the headroom that we have built in . . . provides the stability that we need.”
In an interview with the FT, Reeves defended the UK’s decision not to threaten retaliation against the Trump administration over the Greenland dispute.
But she said the current global turmoil increased the arguments for the UK to ease barriers with new partners, as well as existing ones, as it seeks to bolster growth and bring down prices.
Reeves said the “only way forward” was to stay calm and pursue negotiations with the US, while talking to other European countries, as well as Canada and Gulf nations, to bolster international trade.
“Our message is even while others are erecting barriers to trade, we want to bring them down. We think that is good for Britain, good for consumers and good for business,” she said.
She added: “My strong belief is that in a changing world we must deepen old economic relationships but also be ambitious in planning and forging new ones.”
Reeves said she did not accept a suggestion that the US could not be trusted on its trade deal with the UK, adding that the agreement negotiated last year “still stands”.
However, the US is currently levying a 25 per cent tariff on imports of steel and aluminium from the UK despite agreeing in May to cut this to zero. On top of this, it has now threatened to impose 10 per cent tariffs on the UK and several other Nato allies from February 1.
The measures Trump is threatening would hit manufacturers already feeling the effects of the tariffs imposed in 2025, even before reckoning with the longer-term consequences of a breakdown in transatlantic trade.
Paul Dales, at the consultancy Capital Economics, said that since May, the average monthly value of the UK’s goods exports to the US had fallen by £0.75bn, or 13 per cent compared with the year before Trump’s re-election.
If the new tariffs now threatened also took effect, the combined effect could cut UK GDP by 0.30-0.75 per cent, he estimates.
But Reeves has come to Davos bent on making the case for Britain as an investment destination, saying she believed in the benefits of “open economies — open to trade, open to investment and open to talent”.
She said that against a backdrop of tougher immigration rules, she wanted the UK to be “a magnet for talent”, pointing to newly announced plans to waive visa fees for some businesses bringing in experts to work in priority sectors and for top scientists and researchers joining UK universities.
However, Reeves also confirmed that the government remained opposed to rejoining a customs union with the EU, and was instead looking to make progress on more modest plans relating to food and farming; electricity and energy trading; and “some form of youth mobility”.