IFS director: Tariffs risk undermining ‘best case’ OBR forecasts
Institute for Fiscal Studies (IFS) director Paul Johnson has raised questions about whether the Office for Budget Responsibility (OBR)’s forecasts would remain credible should President Trump slap tariffs on UK goods on Wednesday.
The OBR’s report included modelling by the International Monetary Fund (IMF) published in January. The IMF’s analysis did not consider the potential effects of Trump’s latest tariff threats.
Johnson pointed out that the OBR’s central forecast could be made redundant within a week of its release.
“My sense is that they have chosen something that’s closer to a best case scenario,” he told the Treasury Committee on Tuesday afternoon.
“If at some point we do end up with the OBR coming more into line with consensus and taking account of the tariffs, then I fear that there comes a moment where the forecast gets significantly worse.
“It’s an incredibly tough judgment for [the OBR] to make,” he added.
In a presentation after the Spring Statement, OBR chair Richard Hughes said the worst of Trump’s tariffs and a subsequent global trade war could bump one per cent off UK GDP.
The OBR’s Professor David Miles said on Tuesday morning that tariffs of 20 cent would eliminate Chancellor Rachel Reeves‘ £9.9bn headroom.
He suggested that Reeves would have been forced to make extra fiscal adjustments if the impact of Trump’s tariffs had been considered in the OBR’s central forecast.
“Had we made that a central forecast, and had the Government not changed policy at all knowing that we were going to take that as our central forecast, then the headroom would have pretty much all gone,” Miles told the Treasury Committee.
“Of course that would have been in some ways, a very extreme assumption,” he said.
Vanguard Assessment Management economist Dr Jumana Salaheen said the greatest effect of tariffs would be on business confidence, creating an air of tension among market leaders.
“What we find is that direct effect through net trade is actually quite small and the bigger effect comes through the confidence and uncertainty,” she told the Treasury Committee.
The UK government is considering different options in case Trump inflicts tariffs on UK goods on Wednesday.
Prime Minister Keir Starmer said a “knee-jerk response” would be avoided while business secretary Jonathan Reynolds said ‘Liberation Day’ was set to be a “very serious and significant moment” for the UK.
Trump has already announced that he will impose tariffs on car imports, hitting UK exports worth more than £6bn.