Faced with an economic "stall warning", UK Chancellor of the Exchequer Reeves launched a fiscal tightening package on Wednesday (March 26), significantly reducing spending growth and rebuilding a billion pound fiscal buffer in the budget update. Although this move briefly boosted confidence in the bond market, economists warn that the shadow of the global trade war stirred up by Trump may force the UK to restart tax increases this autumn, adding insult to injury to the already weak UK economy.

Economic alarm sounded across the board

The latest report from the Office for Budget Responsibility (OBR) is like a bucket of cold water: cutting the 2025 economic growth forecast in half, while raising public lending and inflation expectations. Reeves attributed the predicament to a "turbulent era" - from the Ukrainian conflict to Trump's tariffs, the global trading system is undergoing an "earthquake like restructuring". But the OBR pointed out sharply that the new employer tax policy introduced by the finance minister last year will become an "invisible shackle" to suppress residents' income next year.

Difficult balance under the iron law of finance

To maintain the fiscal red line of "2030 balance of payments", Reeves implemented a triple tightening:

1) The growth rate of daily public service expenditure has been compressed from 1.3% to 1.2%

2) Cutting £ 4.8 billion in welfare spending (sparking fierce protests in parliament)

3) Defense spending increases against the trend, forming a 'scissors gap'

Although these measures have resulted in lower than expected bond issuance next year and boosted the rebound of UK bonds, they are seen by the market as a "fiscal pain reliever" rather than a "cure all solution".

The trade war 'black swan' spirals around

OBR simulation shows that if the United States fully implements a 20% equivalent tariff, the UK's GDP may shrink by 1% in 2026-27. Shamil Gohil, fund manager at Fidelity International, pointed out, "The current fiscal space repair is like using a band aid to mend internal wounds. When high interest rates collide with low growth, the real fiscal tsunami is still ahead

summarize

This budget update has exposed a deep-seated contradiction in the governance of the UK economy: how long can Reeves' austerity surgery stick on the tightrope between "fiscal discipline" and "growth demand"? As the countdown to Trump's tariffs ticks, traders in the City of London have begun betting that the sensitive term "tax increases" may be brought back to the negotiating table in this fall's budget amendment. In the winter of global economic "deglobalization", the fiscal firewall of Downing Street is facing extreme stress testing.

Reeves' plan to cut spending and rebuild the fiscal buffer reduced the risk of British debt and pushed the price of British treasury bond bonds to rebound. If the market believes that the UK's fiscal discipline is stable, the pound may receive short-term support.