Exclusive:Future devolution settlements could shrink after Trump tariffs, IPPR Scotland warn

The US president announced a flurry of tariffs on Wednesday in what he dubbed “liberation day”, including a ten per cent hit on the UK.

Economists have warned any escalation to a trade war could wipe out the fiscal headroom created in Rachel Reeves’ Spring Statement.

It comes as the SNP wrote to the Chancellor urging her to scrap the 10.1 per cent levy on Scotch Whisky following the tariffs, warning Trump’s decision “will hammer Scottish businesses and consumers”.

Speaking to Scotland on Sunday, Stephen Boyd, the Director at IPPR Scotland, warned the White House’s decision could “obliterate” the space created by Ms Reeves’ Spring Statement, in which she made extensive cuts to welfare.

He said: "The Office for Budget Responsibility had already warned that the Chancellor’s fiscal headroom could easily be obliterated by forthcoming trade conflict. The tariffs Trump announced this week were significantly higher than anticipated and, as a result, the prospects for economic growth and fiscal headroom look even bleaker than when the Spring Statement was delivered.

"The impact on the Scottish budget is uncertain and largely dependent on how the Chancellor chooses to respond to deteriorating forecasts. Nevertheless, as things stand, it is difficult to envisage anything other than tighter settlements in future years.

“The world has changed since the Chancellor set out her new fiscal rules last summer. Trump’s irrationality has exposed the fickle nature of the economic forecasts on which the Chancellor assesses her fiscal rules.

“She – and the UK government as a whole - must now start to show some flexibility in adapting to these changed circumstances. Fiscal rules cannot continue to be met by cutting the spending that supports the living standards of society’s most vulnerable people".

Ministers have insisted they will remain “cool and calm” as they seek to secure an economic deal to mitigate the damage to Britain, but are not ruling out the possibility of retaliatory levies on a range of American products.

But even with an agreement, the global impact of Wednesday’s tariffs is expected to cause a significant economic shock to the UK.

Experts predicted that UK economic growth – already expected to amount to just one per cent this year – could be up to 0.5 percentage points lower than expected over coming years as a result of the tariffs.

The IPPR Scotland claim follows warnings by the Institute for Fiscal Studies (IFS) that Scotland faces long-term funding issues due to the “Barnett squeeze”.

David Phillips, the head of devolved and local government finance at the IFS, told Scotland on Sunday that devolved governments could be hit in several ways. He explained slower growth could impact devolved tax revenues, and if Scotland’s economy and tax revenues were hit harder than the rest of the UK, it could reduce the Scottish budget.

He also suggested if the UK Government raised more from income tax to avoid spending cuts, that would increase the size of the block grant adjustment for income tax. The Scottish budget would be lower unless the Scottish government also did the same.

The US President’s announcement on Wednesday sent stock markets tumbling across the globe, with the Prime Minister warning it marks the beginning of a “new era” in world trade.

It has also sparked fears for Scottish businesses, with the Scotch Whisky Association saying it was “disappointed that Scotch whisky could be impacted by these tariffs”.

The Tories introduced a 10.1 per cent increase in August 2023, which was followed by a 3.65 per cent hike under Labour, introduced this year.

Now SNP MP and vice-chair of the APPG on Scotch whisky, Graham Leadbitter, has written to Ms Reeves asking her to step in and protect the industry.

In a letter seen by Scotland on Sunday, he wrote: “As you will be aware, Donald Trump’s tariffs will hammer Scottish businesses and consumers, but no industry more so than the Scotch Whisky industry.

“In 2022 alone, Scotland’s world class product generated £7.1bn for the UK economy supporting more than 40,000 jobs with one fifth of Scotch Whisky exports going to the United States. Scotch Whisky not only supports jobs, but it makes up a quarter of all Scottish exports to the US and when Donald Trump was last in office, his tariffs saw the Scotch Whisky industry lose more than £600m. These facts make it critical that Scotch Whisky is supported at this very worrying time.

“Research from the Scotch Whisky Association showed that after the UK government increased whisky excise duty by 10.1 per cent in 2023, revenue received by the Treasury fell by £298 million per year. Not only do these whisky specific taxes hit jobs and the industry, they deliver less revenue to your Treasury.

“With Trump’s tariffs hitting Scotch Whisky for the second time in just five years, it is within your gift to support the industry, honour your word to Scotch Whisky and cut the tax on Scotland’s world class product.”

The Scotch Whisky Association has estimated the 10 per cent tariff imposed by Mr Trump could result in between £200 million and £400m worth of export losses annually.

Responding to the IPPR Scotland comments, Finance Secretary Shona Robison said: “We have urged the UK Government not to attempt to balance the books on the backs of disabled people and to instead provide the funding needed for our public services.

“With US tariffs now threatening the UK’s economic growth, we support calls for the Chancellor to show more flexibility around her fiscal rules – inflicting further austerity cuts on Scotland would be unacceptable.

“Given the implications for our funding, we are seeking engagement with the UK Government ahead of the Spending Review.”

A UK Government spokesperson said: “We’re committed to supporting businesses, including Scotch whisky producers, through capping corporation tax at 25 per cent and publishing a business tax roadmap so that future investments can be planned with confidence.

“To provide specific support to the Scotch Whisky industry, the UK Government will reduce fees for geographical verification making it cheaper for producers to badge their products.”