(Bloomberg) -- British Chancellor Rachel Reeves will need to raise taxes further to get the public finances on a sustainable footing, the OECD said as it upgraded its growth forecasts for the UK.
In its first health check on the UK economy since the chancellor sharply increased both taxes and borrowing in her October budget, the global institution called for “prudent” fiscal policy to build a larger buffer against potential shocks like another increase in energy prices or rising trade tensions and protectionism.
“Rebuilding fiscal buffers and continuing to mobilize additional revenue, including by closing loopholes and reducing distortions in the tax system, is necessary to ensure fiscal sustainability,” the OECD said in its latest economic outlook. It blamed “large government deficits” which will keep gross government debt climbing from 103% of GDP this year to 106.2% in 2026.
The call for tax rises clashes with Reeves’ commitment last week that she was “not coming back with more borrowing or more taxes,” a statement that has not been repeated by Cabinet colleagues including the prime minister. At the budget she raised taxes by £40 billion ($50.7 billion) a year to fix Britain’s ailing public services, one of the biggest tax-raising events on record, triggering a backlash from businesses and farmers.
Despite the OECD’s warning that Reeves’ £9.9 billion of fiscal headroom may not be enough to shield the government from unexpected shocks, the organization upgraded its growth forecasts for the UK on the back of the budget measures, saying “momentum is positive.” The economy will expand 1.7% in 2025, revised up from 1.2% in September, but slow to 1.3% in 2026 as front-loaded government spending tapers off.
The UK will be the third-fastest growing economy in the Group of Seven advanced nations both next year and in 2026, behind the US and Canada. Growth for 2024 was revised down to 0.9% from 1.1% due to weaker activity than expected since the July 4 election. The OECD outlook is less optimistic than the Office for Budget Responsibility was at the budget, which would suggest Reeves’ headroom is even smaller and she will need to raise taxes or find savings.
The OECD also warned that next year’s spending plans will keep inflation elevated and risk delaying interest-rate cuts. “Wage-driven pressures on the price of services and the fiscal stimulus will keep underlying price pressures elevated,” it said. Inflation will average 2.8% next year and 2.3% in 2026. Rates will continue to come down from the current level of 4.75%, stopping at 3.5% in “early 2026.”
The OECD outlook also revealed that rents are rising faster in the UK than in any of the 22 other OECD member countries whose housing markets it looked at.
--With assistance from Zoe Schneeweiss.
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