Will Tax Hikes and Spending Cuts Stifle UK Growth? Insights from the OECD

The Organization for Economic Co-operation and Development (OECD) warns that the UK’s economic growth will struggle due to tax increases and tighter government spending constraints. The OECD predicts a growth rate of 1.4% for this year, cooling to 1.2% by 2026, along with high inflation that remains the highest among G7 nations despite anticipated easing. Tax changes announced in the recent budget, including a significant £26 billion increase over five years and freezes on income tax thresholds, are expected to inhibit household disposable income and consumption.

While the UK is projected to be the second-fastest growing economy in the G7 this year—just behind the US—it is forecast to slow down due to global uncertainties. The OECD sees growth returning to 1.3% in 2027, spurred slightly by lower interest rates and improved global trade. Current UK inflation stands at 3.5%, with expectations to drop to 2.5% next year and 2.1% by 2027, largely thanks to initiatives reducing energy and fuel costs.

Unemployment is anticipated to rise, reaching 4.9% in 2026 and 5% by 2027. UK Chancellor Rachel Reeves has defended the budget decisions, asserting they will help reduce inflation and the cost of living. However, Shadow Chancellor Mel Stride contends that the government’s policies are detrimental to work and business. The OECD acknowledges a potential for substantial improvement in the government deficit but warns of risks underscore the importance of careful tax and spending reviews.

Globally, while the OECD sees a resilient economy with 3.2% growth this year, it cautions that any rise in trade barriers could adversely affect supply chains. The OECD also identifies risks associated with the AI bubble possibly leading to abrupt price corrections. Meanwhile, the US economy’s growth has been revised upward, reflecting a changing global economic landscape.