Trump’s commitment to protectionism has destroyed the growth models on which Reeves’s budget was built

Mike Buckley is the director of the Independent Commission on UK-EU Relations and a former Labour Party adviser

As the dust settles on Rachel Reeves’ first budget, a number of conclusions can be drawn. First, and most obviously, she inherited an economic mess, parlous Government finances and disastrous public services from her predecessors.

She deserves plaudits for having made choices the effect of which will be to bring dramatic improvements in all three areas. Planned government investment will boost the economy and encourage private investment; tax increases place Government finances on a far more stable footing; public services – most notably health and education – are to receive levels of investment which, while they will not undo all the damage seen under fourteen years of Tory underspending, will begin to set things right.

A number of economists praised Reeves’ commitment to balance the books and to invest for the long term while at the same time pointing to potential pitfalls. The OBR believes her budget is unlikely to improve growth sustainably over the next five years, while acknowledging its measures will improve growth in the short term.

Paul Johnson at the Institute for Fiscal Studies criticised the choice of employers’ national insurance as the main revenue raising measure, arguing it would impinge disproportionately on workers and employers than an increase in income tax. He believes it will lead to lower wages, increase the incentive on firms to use self-employed contractors rather than employees, and increase the tax on employment income relative to that on other forms of income.

Second, as with most budgets there have been unintended consequences. This time it is planned changes to inheritance tax which have created most conflict. Farmers were astonished and angered to learn that the tax will be applied to farming assets worth over a million pounds.

Given the value of land and agricultural equipment together can easily reach that amount even on modest sized farms there is widespread anger and a feeling among farmers that Government has simply not understood the consequences for family farms hitherto passed down generations.

Farmers now plan protests while their representatives claim that rural communities, many of whom had only recently put their trust in Labour after Tory-authored disasters of Brexit and subsequent harms, are “furious” and that Labour “had no hope of holding on to them” without a row back of the tax plans.

Third, Reeves’ budget was delivered at a moment in time that is now past. The ensuing two weeks have seen Donald Trump re-elected to the US Presidency, a game changing moment for America itself but, given Trump’s plans on climate change, defence and Ukraine, trade and tariffs, for the rest of the world too.

Britain is no exception.

Trump’s commitment to protectionism has destroyed the growth models on which Reeves’s budget was built. He has pledged to impose tariffs of up to 20% on all US imports, and a 60% penalty on Chinese goods, while the EU plans retaliation in a two-step trade plan. 

If Trump keeps his word the IMF forecasts 0.8% would be lost from global economic output next year, 1.3% in 2026. Their scenario is deliberately constrained because it assumes a fairly modest retaliation from China, the EU and others which may be unrealistic given the electoral imperative some governments would feel to push back.

Given our size and global openness the UK would be particularly affected: the National Institute of Economic and Social Research (NIESR) believes a trade war could lower UK economic growth by 0.7% in the first year alone. In this – highly realistic – scenario Reeves’ pre-budget calculations would be meaningless.

This will force a renewed focus on the UK-EU trading relationship. US tariffs will bring more urgency to conversations between London and Brussels on reducing trade barriers put in place by Boris Johnson’s post-Brexit deal. Given the estimated 4% hit to UK GDP from Johnson’s deal there is growth to be had if agreement can be found.

Trump’s plans will not only impact UK trade and GDP. His commitment to row back on the climate transition creates greater urgency for other nations, including the UK, to make progress. Keir Starmer has already stepped up to that challenge, pledging greater emissions reductions in the opening days of COP29. This is entirely welcome, but it comes with costs.

Trump’s return will also impact defence spending. He has long said he sees most NATO members as freeloaders taking advantage of US generosity. In his second term that generosity is likely to end, or to come with significantly greater strings attached.

If he is true to his word – and given his hawkish appointments we have to assume he will be – he will end or severely curtail US support for Ukraine, leaving Europe to fill the breach.

The EU has this week freed up billions of euros for the bloc’s defence and security budget, in effect allowing member states to redirect ‘cohesion funds’ to defence. As much as €392bn could be made available from mostly-unspent funds which had been allocated to reduce inequality.

This is a preamble to a stronger focus on defence in the next EU budget. A recent report by former Finnish president Sauli Niinistö advocated reserving 20 per cent of that for defence.

“We are under stronger pressure than others, we need more military presence. Our defence expenditure is high, the next European budget should take that into account,” said Jürgen Ligi, finance minister of Estonia.

Reeves increased the UK defence budget to 2.3% of GDP, with an ambition to reach 2.5% by 2029. Treasury minister Darren Jones said the Government would not commit to a deadline until it had completed its strategic defence review.

Labour is in the early stages of negotiating a defence and security agreement with the EU. Our recent report argues that the need is urgent, and that the Government and EU should take action now, building on what is now possible with further measures next year and beyond.

The Government response to these changed circumstances has, wisely, been cautious. They have congratulated Trump. Some, including Foreign Secretary David Lammy, have spent significant time building rapport with current and likely members of Trump’s team. There is even talk that the new President will offer the UK exemptions, perhaps on the premise that we remain distant from the EU.

But this is conjecture. What Rachel Reeves knows for certain now is that her budget, for all its merits, will not be her last word on the UK economy. Britain’s economy exists in an unstable, in some ways newly harsh, world. We will have to adjust.

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