The Organisation for Economic Cooperation and Development (OECD) has delivered a mixed assessment of the UK's economic prospects, upgrading its growth forecast for next year while issuing a stark warning about the impact of government tax and spending plans on household finances.
Growth Upgrade Amid Fiscal Headwinds
In its latest report, the Paris-based thinktank predicted the UK economy will expand by 1.2% in 2025. This represents an upgrade from its previous forecast of 1% and means the UK is expected to grow faster than the eurozone's three largest economies: France, Germany, and Italy, which are each forecast to grow at less than 1%.
However, the OECD cautioned that this growth will occur against a challenging backdrop. It stated that the government's policy of 'fiscal consolidation' – a combination of higher taxes and restrained public spending – will act as a significant headwind. The organisation specifically warned that past and ongoing tax and spending adjustments will continue to weigh on household disposable income, thereby slowing down consumer expenditure.
Reeves's Budget and the Tax Burden
The warning comes just days after Chancellor Rachel Reeves delivered a budget that included approximately £26 billion in tax rises. Key measures, such as the freeze on income tax thresholds, are projected by the Office for Budget Responsibility (OBR) to pull an additional 1.7 million people into higher tax brackets, pushing the overall tax burden to a record high.
While the OECD's growth upgrade offers some political respite for the Chancellor, the forecast also indicates a slowdown from the 1.4% growth predicted for 2024. The report aligns with a broader global trend of stagnant growth across industrialised nations, as the temporary boost from activity related to new US trade tariffs begins to fade.
Global Context and Domestic Turmoil
Globally, the OECD expects economic growth to slow from 3.3% this year to 3.2% in 2025. The United States is forecast to grow by 1.7% in 2025, down from 2.4% in 2024. The report served as an implicit critique of protectionist policies, with OECD Secretary General Mathias Cormann emphasising that "constructive dialogue between countries is central to ensure a lasting resolution to trade tensions."
Domestically, the economic establishment was rocked by the resignation of Richard Hughes, the chair of the OBR. Hughes quit following a leak inquiry related to budget information and amid a dispute with the Chancellor over whether she misled the public regarding the state of public finances based on private OBR briefings.
On a more positive note for consumers, the OECD predicts UK inflation will gradually return to its 2% target by mid-2027, allowing the Bank of England to cut interest rates further. It forecasts two more reductions, taking the base rate from its current 4% to 3.5% by the second quarter of 2026.
Responding to the report, Chancellor Reeves welcomed the upgraded growth and lower inflation forecast, stating: "Last week, my budget cut waiting lists, cut borrowing and debt, and cut the cost of living. Less than a week later, the OECD has upgraded our growth and cut its forecast for inflation next year."
