UK Economic Growth to Slow Amid Public Finance Squeeze, OECD Warns

The OECD projects UK growth to slow to 1.3% in 2025 and 1% in 2026, citing public finance constraints, rising debt, and weak consumer confidence. The government faces pressure to maintain fiscal discipline.

OECD: UK Economic Growth Faces Headwinds from Fiscal Constraints

The United Kingdom's economic outlook is expected to weaken as public finance pressures and rising debt levels weigh on growth, according to the latest Global Economic Outlook released by the Organisation for Economic Co-operation and Development (OECD).

Slowing Growth in 2025–2026

In its report, the OECD forecasts:

1.3% GDP growth in 2025

1.0% GDP growth in 2026

Growth is expected to remain modest, held back by:

Intensifying global trade tensions

Tighter financial conditions

Heightened uncertainty in both consumer confidence and business sentiment

The OECD notes that these negative forces are likely to outweigh any positive impact from recent government budgetary measures introduced in autumn.

High Debt Despite Lower Deficits

While the UK’s budget deficit is forecast to decline from 5.3% in 2025 to 4.5% in 2026, the public debt-to-GDP ratio is set to rise to 104% by 2026. High interest payments on debt will continue to strain public finances.

Labour Government Remains Firm on Fiscal Discipline

Chancellor Rachel Reeves and the Labour government have emphasized their commitment to:

Meeting daily spending needs through tax revenues

Ensuring that public debt declines as a share of GDP by 2029–30

Upholding fiscal rules as non-negotiable, even amid tepid growth and rising borrowing costs

However, the OECD warns that the government’s “very thin fiscal buffers” may leave little room to respond to future economic shocks without breaching its fiscal rules.

Spending Review Approaches

This economic forecast arrives just days before Chancellor Reeves is scheduled to deliver her first Spending Review on June 11, which will set long-term departmental budgets.

Since taking office, the Labour government has:

Cut welfare spending

Increased business taxes

Pushed for planning reform to boost housing and infrastructure

Pledged to raise defense spending to 2.5% of GDP by 2027, funded in part by cuts to foreign aid

With public borrowing capped and tax hikes ruled out, there is growing speculation that Reeves may announce further budget cuts in the upcoming review.

OECD Recommendations

The OECD urges the UK government to stay the course with its fiscal plans and recommends:

Targeted spending cuts, including closing tax loopholes

Revenue-raising measures, such as revising outdated property tax bands

Tax system reform to remove market distortions

Pro-work welfare reforms to boost labor force participation while protecting vulnerable groups

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Source: CNBC