Trump tariffs would halve UK growth and drive up prices, says thinktank | Donald Trump

UK growth would halve if Donald Trump wins the US presidential race and imposes the drastic new tariffs he has threatened, a leading think tank has warned.

The National Institute of Economic and Social Research (NIESR) said protectionist measures planned by the Republican challenger for the White House would lead to weaker activity, rising inflation and higher Bank of England interest rates.

Ahmet Kaya, a NIESR economist, said that if Trump imposed a 60% tariff on Chinese goods and a 10% tariff on goods from all other countries, the resulting trade war would hit British growth by 0.7 percentage points or 0.5 percent lower points in the first two years.

“Britain is a small, open economy and would be one of the hardest hit countries,” Kaya said. NIESR has estimated that the UK inflation rate would be 3 to 4 points higher over two years, while interest rates would be 2 to 3 points higher.

Without the Trump tariffs, NIESR forecasts the UK will grow by 1.2% in 2025 and 1.4% in 2026, inflation will settle close to the government's 2% target and official interest rates will fall from its current level of 5% to 3.25%.

Kaya said the impact of Trump's measures would be more severe if affected countries imposed their own tariffs. U.S. growth would fall by about 1.3% to 1.8% in the first two years after tariffs take effect, depending on whether retaliation occurred.

The think tank expressed skepticism about the likely impact of last week's budget on the economy's long-term growth potential, estimated at 1.2% a year.

Stephen Millard, deputy director of macroeconomic modeling and forecasting at the NIESR, said the increase in public infrastructure spending announced by Rachel Reeves would only offset cuts announced by the previous government.

Reeves changed the way the government assesses whether the national debt is sustainable, and Millard said taking into account the state's financial assets and liabilities would allow for greater public investment.

“But exactly when and by how much remains to be seen. I suspect more needs to be done,” Millard said.

“Last week’s landmark Budget – the first from a Labor chancellor in 14 years – will boost demand over the next few years, driving higher GDP growth and inflation and slowing the fall in interest rates. And increasing the employer contribution rate to social security will lead to a reduction in job creation in the coming years, which will lead to greater unemployment.”

The NIESR quarterly economic update also said Reeves' decision to maintain the freeze on income tax allowances and thresholds until April 2028 would cost the poorest 15% of households £600 a year in additional taxes.

The poorest families in the UK were hit hardest by wages failing to keep up with rising prices during the cost of living crisis, causing their living standards to fall by around 20% – or £2,500 – from 2021-22 to 2024 – 25.

Even if the standard of living is now rising again, according to current trends, it will not return to the pre-2022 level for an average family until 2026.

Adrian Pabst, deputy director of public policy, said: “The government's focus on faster growth through greater investment is welcome, but some of the tax decisions risk discouraging more business investment while penalizing low-income households.”

Instead of leaving personal tax thresholds frozen for another three and a half years, it would be better for the living standards of households hit hardest by the economic shocks in recent years if the government had additionally raised income tax and at the same time increased the thresholds from 2025 lift.

“It is time to throw off the self-imposed fiscal straitjacket and do the right thing for the economy and society,” said Pabst.