New tax rises warning as borrowing jumps in UK hit by tariff wars
- TBA
- Apr 28
- 4 min read
New tax rises warning as borrowing jumps in UK hit by tariff wars
Economists warn that, against the backdrop of a surge in borrowing triggered by U.S. President Trump’s new tariffs, U.K. Chancellor Rachel Reeves may be forced to further raise taxes in the autumn budget later this year.
Official data shows that the British government’s borrowing exceeded expectations in the last fiscal year. As of the end of March this year, public sector net borrowing rose to £151.9 billion. This figure is £14.6 billion higher than the £137.3 billion previously forecast by the Office for Budget Responsibility, equating to £95,300 of debt per household.
Meanwhile, the total annual borrowing was also £20.7 billion higher than during the same period the previous year.
Just a day before the release of this data, the International Monetary Fund (IMF) sharply downgraded its forecast for U.K. economic growth this year by 0.5 percentage points to 1.1%, while raising its inflation forecast by 0.7 percentage points to 3.1%.
A series of gloomy economic forecasts has further increased the public finance pressures facing Chancellor Reeves. She previously stated she would "defend Britain's interests" and is preparing to travel to Washington to meet with other finance ministers to push for a trade agreement with the United States.
Speaking at the Semafor World Economy Summit in Washington, Reeves said: “The message we've received is that the U.S. is very keen to reach an agreement with the U.K. ... The cooperation we are aiming for is not limited to a tariff agreement, but also includes establishing technology partnerships and further deepening our already close ties in security and defense.”
Elliott Jordan-Doak, U.K. Senior Economist at Pantheon Macroeconomics, said: "Looking ahead to the next fiscal year and the upcoming autumn budget in October, the breakdown of global trade patterns and geopolitical uncertainty will further intensify the pressure on the Chancellor."
He said: “We had already anticipated that the government would need to raise defense spending above the recently pledged 2.5% of GDP, reaching at least 3.0% of GDP by 2027. To ease fiscal pressures, this will likely require a combination of borrowing and tax increases.”
Retail sales see biggest rise for nearly four years
According to data from the Office for National Statistics (ONS), U.K. retail sales volume grew by 1.6% in the first quarter of this year compared to the previous quarter, marking the largest quarterly increase since July 2021.
Retail sales in March rose by 0.4% month-on-month, far exceeding market expectations of a 0.4% decline. Sunny weather boosted sales at garden centers, and demand for clothing and home improvement goods also increased. However, the ONS noted that food sales fell, with supermarkets in particular performing poorly.
Analysts also warned that sales might weaken in the coming months. Danni Hewson, head of financial analysis at AJ Bell, said: "March brought some relief for many households, as inflation continued to fall and wage growth was not yet being swallowed up by rising bills. It was also an encouraging signal for retailers. However, most businesses are having to brace for a possible turning point ahead."
Another survey showed that consumer confidence slipped in April. Market research firm GfK reported that its Consumer Confidence Index fell to its lowest level since November 2023, as people faced rising bills and became more pessimistic about the economic outlook.
At the same time, a corporate health assessment released by leading consultancy Begbies Traynor showed that the number of companies in “critical” financial distress surged by 13%. Just hours after that report was published, official data revealed that corporate insolvencies in England and Wales rose by 9% year-on-year in March.
This series of data aligns with other recent signs that the U.K. economy is slowing, and that businesses and households are under mounting pressure from rising bills. Tensions have also been further aggravated by U.S. trade protectionist policies, with challenges continuing to intensify since the beginning of this month.
However, the gloomy outlook has led a growing number of economists and financial market participants to believe that the Bank of England will have more room to accelerate interest rate cuts starting next month, despite the risk of a new wave of inflationary pressure in the future.
Energy price cap set to fall in July, according to forecast
According to the latest forecast from energy consultancy Cornwall Insight, U.K. household energy bills are expected to fall in July, due to a global slump in natural gas prices triggered by U.S. President Trump's trade tariffs.
The company said it expects the U.K. energy regulator Ofgem to announce a 9% reduction in the typical household energy bill, amounting to a decrease of £166, bringing the average bill down to £1,683.
Craig Lowrey, principal consultant at Cornwall Insight, noted that recent warm weather has also led to a drop in short-term energy demand, further pushing market prices downward. However, he also cautioned that the evolving and unpredictable nature of U.S. policies could alter the situation again before July, meaning there is still uncertainty around the current forecast for price cuts.
“While a drop in bills is always good news for households, we mustn't be overly optimistic,” he said. “We've all witnessed rapid market surges as well as rollercoaster-like downturns, and the market’s quick decline this time highlights its extreme vulnerability to geopolitical and market fluctuations.”
Ofgem adjusts the household energy price cap every three months, mainly based on wholesale market costs. The price cap for the period from July to September will be officially announced on May 27.
The energy price cap system was introduced by the government in January 2019 to set a maximum price per kilowatt-hour (kWh) that energy suppliers can charge consumers in England, Scotland, and Wales. However, the cap does not limit a household’s total bill, as final costs still depend on actual energy usage.
Despite recent reductions in the price cap, household energy bills remain significantly higher than historical levels. For instance, in April 2021, the energy price cap stood at just £1,138 — almost one-third lower than the latest forecast of £1,683.
