The UK's economic recovery is set to face significant pressure from planned tax increases and spending cuts, according to a major new international report. The Organisation for Economic Co-operation and Development (OECD) has warned that the government's fiscal consolidation will act as a "headwind" to growth, with household budgets and consumer spending bearing the brunt.
Slowing Growth and Persistent Inflation
In its latest Economic Outlook, published on Tuesday 2 December 2025, the influential Paris-based body downgraded its forecast for UK expansion. It predicts growth will slow from 1.4% this year to just 1.2% in 2026, before a marginal recovery to 1.3% in 2027. The organisation highlighted "substantial" downside risks to this already modest outlook, primarily linked to the government's fiscal plans.
Compounding the challenge, the OECD stated that inflation in Britain will remain stubbornly high compared to its peers. It is forecast to be the highest in the G7 this year at 3.5%, and the second highest in 2026 at 2.5%, trailing only the United States. While this is a slight improvement on its previous forecast of 2.7%, it means prices will continue to rise faster in the UK than in most other major advanced economies for the foreseeable future.
Budget Fallout and Fiscal Squeeze
The report lands amid intense political scrutiny of Chancellor Rachel Reeves's Budget, delivered on 26 November. The Chancellor announced around £26 billion in tax rises, including a continued freeze on income tax thresholds that is expected to drag 1.7 million more people into higher tax brackets. The Office for Budget Responsibility (OBR) confirmed this would push the UK's overall tax burden to a record high.
The OECD noted that the government's consolidation path is "more backloaded than we had expected", meaning a greater proportion of the fiscal tightening is scheduled for later years. Luiz De Mello, a director in the OECD's economics department, emphasised that while the Budget aids public finance consolidation, the timing of measures is crucial given the fragile growth outlook.
Interest Rates and Structural Reforms
On monetary policy, the OECD anticipates the Bank of England will implement two further interest rate cuts, taking the base rate from its current 4% down to 3.5% by the second quarter of 2026. It suggests this will likely mark the end of the easing cycle. These lower borrowing costs, alongside a predicted improvement in global trade, should provide "moderate tailwinds" for investment and exports from late 2026 onwards.
However, the report also cautioned that rates could stay higher for longer if inflation proves persistent, exacerbated by high food costs and the knock-on effect of April's increase in payroll tax. The OECD urged the government to ensure its tax and spending measures are "well-calibrated" to support long-term growth potential.
It pointed to ongoing structural reforms—such as overhauling infrastructure planning and simplifying financial services regulation—as having "huge potential" to make the UK business sector more dynamic and efficient over the longer term.
Political and Global Context
Shadow Chancellor Sir Mel Stride seized on the report, stating: "Rachel Reeves promised growth but growth is expected to weaken next year, because of her choices. This is the cost of policies that punish work, businesses and investment."
In response, Chancellor Reeves defended her Budget, highlighting that the OECD had subsequently upgraded its 2026 growth forecast from 1% to 1.2% and cut its inflation prediction. She argued her choices were expected to cut inflation by 0.4 percentage points, helping to reduce living costs.
Globally, the OECD kept its forecasts unchanged, predicting world GDP growth will slow from 3.2% in 2025 to 2.9% in 2026, before recovering to 3.1% in 2027. It warned that the full impact of higher tariffs, particularly in the US, is yet to be felt but is already affecting business costs and consumer prices.
