The Organization for Economic Cooperation and Development (OECD) warned Prime Minister Rachel Reeves that her wafer’s weak fiscal buffer could prove whether the UK economy is affected by a fresh downturn after lowering its growth forecast for the country.
In its latest economic outlook, the Paris-based agency puts its forecast for UK GDP growth this year and the following year. Now, it expects the economy to grow only 1.3% in 2025, below the earlier forecast of 1.4%, while the forecast for 2026 is expected to slow to 1% compared to the previous estimate of 1.2%.
The OECD believes that rising global trade uncertainty, sustained high interest rates and decline in household and business confidence are key factors in the weak outlook. It warns that slow economic performance could endanger the government’s ability to comply with its self-imposed fiscal rules.
“At present, a very thin fiscal buffer may not be enough to provide adequate support without breach of fiscal rules, but if there is a bad impact,” the OECD said.
The warning comes days after the International Monetary Fund (IMF) issued a similar alert and then before the government conducts a three-year spending review next week. Reeves faces increasing pressure to maintain control of the minister’s budget while delivering on recent policy commitments, including reversing plans to limit pensioners’ winter fuel payments.
Reeves’ key fiscal rule is to ensure that day-to-day government spending is fully funded by taxes at the end of the current parliament. But the Prime Minister has only £8.9bn left in her own spring budget, the narrowest profit on record.
The OECD urges the Prime Minister to provide a “balanced” fall budget that includes targeted spending cuts and tax reforms. It recommends closing tax loopholes, reevaluating the Council’s tax belt based on current property values, and eliminating distortions in the tax system to strengthen public finances.
The report predicts that the UK’s budget deficit will drop from 6% of GDP in 2024 to 4.5% in 2025, due to strong expected tax revenues. However, the country’s government debt burden is expected to continue to increase by 2026 and 104% of GDP by 2026.
It noted that further supply-side reforms – including progress on overhauls within the national planning policy framework – could help increase potential output and alleviate long-term fiscal pressures.
The OECD expects the Bank of England to begin easing monetary policy, reducing three interest rates over the next 12 months.
On the global stage, the OECD has cut its forecast for world growth significantly after President Trump reintroduced steep import tariffs. Now, it expects global GDP to grow only 2.9% this year, down from 3.3% in March.
The U.S. has one of the biggest downgrades, with a strong growth of 2.8% expected to slow to 1.6% after a strong 2.8% increase in 2024. U.S. inflation is also expected to rise to an average of 3.2% from 2.5% last year.
“The economic outlook will be weakened worldwide, but it is almost no exception. Lower growth and less trade will generate income and slow employment growth,” said Alvaro Pereira, chief economist at the OECD.
OECD caution adds further pressure on Reeves in preparation for the first major spending review of its prime minister and emphasizes tough balancing behavior when it strives to maintain fiscal discipline while also involving a more fragile global economy.
