The OECD has recently revised down its growth forecasts for the UK, projecting economic expansion of 1.3% in 2025 and just 1% in 2026, compared to earlier estimates of 1.4% and 1.2%. This adjustment reflects a range of global and domestic challenges, including the impact of increased tariffs on UK exports to the US following trade tensions originating from the Trump administration, rising global prices, and weakening business and consumer confidence. Together, these factors contribute to a noticeably slower growth trajectory.
Despite these headwinds, the UK is still expected to outperform several major economies, such as France, Germany, and Japan. However, the OECD warns that the country’s economic momentum is waning. Elevated interest payments on government debt are placing additional strain on public finances, raising concerns about the sustainability of the fiscal position in the medium term.
Central to the OECD’s concerns is the UK government’s adherence to strict fiscal rules, championed by Chancellor Rachel Reeves. These rules mandate a balanced current budget by 2029/30, a reduction in net financial debt relative to GDP, and stringent caps on social security and welfare spending. The OECD cautions that this fiscal rigidity creates very limited flexibility, leaving the UK exposed to potential economic shocks. Critics argue that these constraints may unnecessarily limit the government’s capacity to invest and respond to emerging challenges.
In response, the OECD recommends a more balanced fiscal strategy, combining selective spending reductions with measures to close tax loopholes and implement targeted tax increases. Proposals include re-evaluating council tax bands to better reflect current property values and addressing distortions within the tax system. Such measures aim to strengthen public finances while supporting sustainable economic growth.
Furthermore, the OECD emphasizes the importance of boosting investment and reviving productivity growth through supply-side reforms. Enhancing productivity is seen as critical to overcoming the UK’s slow-growth environment and maintaining international competitiveness. The forthcoming Spending Review will be a key moment for policymakers to navigate these complex challenges, balancing fiscal discipline with the need to foster economic resilience. Notably, the IMF has suggested that some flexibility in fiscal rules may be necessary to avoid recurrent austerity, potentially offering the Chancellor scope to adjust the existing framework in response to evolving economic conditions.
