A leading thinktank has warned Rachel Reeves that tight government spending and higher taxes will restrict consumer expenditure, despite it predicting the UK economy will grow at a faster pace than France, Germany and Italy next year.
Analysts at the Organisation for Economic Cooperation and Development (OECD) said the government’s ongoing “fiscal consolidation” – meaning higher taxes and reduced government spending – would act as a “headwind” to the UK economy, with “past tax and spending adjustments weighing on household disposable income and slowing consumption”.
The Paris-based organisation predicted that the UK economy would expand by 1.2% next year, while the big three eurozone economies would each fail to reach 1%.
Offering a boost to Reeves after she faced calls to resign after the budget, the UK’s growth rate was upgraded from a previous forecast of 1% for next year. However, that represents a slowdown from the 1.4% growth predicted for this year, unchanged from the last forecast three months ago.
The chancellor – who has put an emphasis on growing the UK economy – announced £26bn worth of tax rises in last week’s budget, with measures including a freeze on income tax thresholds that will leave 1.7 million people paying more, taking the tax burden to an all-time high, according to the Office for Budget Responsibility (OBR).
Separately, the OECD said the US economy would grow by 1.7% next year, down from 2% this year and 2.4% in 2024, in a blow to Donald Trump’s efforts to increase growth by restricting imports and reducing regulations on big industries.
In a report that highlighted how a flurry of activity this year to cope with Trump’s tariffs had given a temporary lift to many economies, the OECD said there would be a return to lower, stagnant rates of expansion across much of the industrialised world.
The UK, like most industrialised countries, is expected to reduce interest rates as inflation is predicted to gradually return to a 2% target by mid-2027. The report predicts there will be two more reductions in rates, from 4% now to 3.5% in the second quarter of 2026, but this will mark the end of rate cuts.
The chancellor welcomed the prospect of higher growth and lower inflation. She said: “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.”
The UK’s economic establishment was rocked on Monday by the resignation of Richard Hughes, the chair of the OBR, which provides the Treasury with independent forecasts of the economic outlook and government finances.
Hughes quit after a report said the leadership of the OBR should take responsibility for information about the budget being accessed before the chancellor’s speech, breeching a longstanding protocol. Hughes was also in the midst of a dispute with Reeves over whether she had misled the public about the state of the public finances based on private briefings by the OBR.
Most governments are expected to struggle to accelerate growth next year while they impose tight spending controls and restrict borrowing levels, limiting their ability to increase investment and raise living standards.
after newsletter promotion
Mathias Cormann, the OECD secretary general, described the return of low growth as a mark of resilience amid global uncertainty about trade. However, he said there were concerns about low levels of productivity across the OECD’s 38 member countries, which also include Vietnam, Mexico, Canada and Costa Rica.
The OECD report said: “The global economy has been resilient this year, despite concerns about a sharper slowdown in the wake of higher trade barriers and significant policy uncertainty. Activity has held up thanks to front-loading of production and trade, strong AI-related investment and supportive fiscal and monetary policies.
“Yet, global trade growth moderated in the second quarter of this year, and we expect higher tariffs to gradually feed through to higher prices, reducing growth in household consumption and business investment. Labour markets are still relatively tight, but are showing signs of easing, as job openings have fallen back to their pre-pandemic levels of 2019.”
In line with most other international forecasters, the OECD said global economic growth would slow from 3.3% in 2024 to 3.2% in 2025 and 2.9% in 2026, followed by a small rebound to 3.1% in 2027.
In October the International Monetary Fund said global growth was projected to slow from 3.3% in 2024 to 3.2% in 2025 and 3.1% in 2026.
In an apparent rebuke to Trump, Cormann said: “Constructive dialogue between countries is central to ensure a lasting resolution to trade tensions and improve the economic outlook.”