Tax increases and spending cuts will act as a “headwind” to growth in the UK economy, according to an influential global policy group.
UK inflation will also remain among the highest among the G7 advanced economies, although it is expected to ease, the Organization for Economic Co-operation and Development (OECD) said.
The OECD predicts that the UK economy will be “stable” with growth of 1.4% this year before slowing to 1.2% in 2026, although its forecast for next year is an improvement on its previous estimate.
The forecast comes less than a week after the Budget, which announced tax increases of £26bn over the next five years.
After slowing next year, UK growth is expected to pick up to 1.3% in 2027, according to the OECD.
However, his forecast is more pessimistic than those of the UK government’s official forecaster, the Office for Budget Responsibility, which expects growth of 1.5% this year, 1.4% next year and 1.5% in 2027.
The OECD said that “fiscal consolidation will be a headwind to the economy, with past tax and spending adjustments weighing on household disposable income and reducing consumption”.
He also said that “sluggish” productivity and “weak” growth in the working-age population, which was partly due to the reduction in inward migration, “continue to act as a drag on the economy”.
However, he expects the economy to get a small boost towards the end of 2026 from lower interest rates and a “gradual” improvement in global trade. The OECD expects two more interest rate cuts from the Bank of England, taking the key rate to 3.5%.
UK inflation is expected to be 3.5% this year – unchanged from the previous OECD forecast, but the highest in the G7.
The inflation rate is then forecast to drop to 2.5% next year, down from its previous estimate of 2.7%.
Responding to the OECD report, Chancellor Rachel Reeves said: “Last week, my Budget reduced waiting lists, reduced borrowing and debt, and reduced the cost of living. Less than a week later, the OECD updated our growth and lowered its forecast for inflation next year.
“The choices I made in the Budget are expected to reduce inflation by 0.4 percentage points, helping to reduce the cost of living for households and costs for our businesses.”
Reeves has come under pressure since delivering her Budget following accusations that she gave a misleading picture of the government’s finances ahead of the announcement.
The OECD said the Budget’s measures would help improve the government’s deficit “substantially”.
