UK faces ‘headwinds’ from tax and spending moves, OECD says

An influential global policy group has said tax increases and spending cuts will be “headwinds” to UK economic growth.

The Organization for Economic Co-operation and Development (OECD) said that although British inflation is expected to ease, it will still be the highest among the G7 advanced economies.

The OECD forecast the UK economy would grow at a “steady” 1.4% this year before slowing to 1.2% in 2026, although its forecast for next year improved from previous estimates.

The forecast comes less than a week after the Budget, which announced a £26 billion tax increase over the next five years.

UK economic growth is expected to edge up to 1.3% in 2027, after slowing next year, the OECD said.

However, its forecast is more pessimistic than that of the UK government’s official forecaster, the Office for Budget Responsibility, which predicts growth of 1.5% this year, 1.4% next year and 1.5% in 2027.

“Fiscal consolidation will be a headwind for the economy, with past tax and spending adjustments affecting household disposable income and slowing consumption,” the OECD said.

The report also said “sluggish” productivity and “weak” working-age population growth – partly due to slower inward migration – would “continue to weigh on the economy”.

However, it expects the economy to get a small boost in late 2026 from lower interest rates and a “gradual” improvement in global trade. The OECD expects the Bank of England to cut interest rates two more times, taking the key rate to 3.5%.

British inflation this year is expected to be 3.5%, the same as the OECD’s previous forecast, but the highest among the G7.

Inflation is expected to fall to 2.5% next year, down from the previous forecast of 2.7%.

Responding to the OECD report, Chancellor Rachel Reeves said: “Last week, my budget slashed waiting lists, cut borrowing and debt, and lowered the cost of living. Less than a week later, the OECD upgraded our economic growth and cut its inflation forecast for next year.”

“The choices I have made in the budget are expected to reduce inflation by 0.4 percentage points, helping to lower the cost of living for households and costs for businesses.”

Reeves has been under pressure since delivering the budget amid accusations she gave a misleading picture of the government’s finances ahead of its release.

The OECD said the budget measures would help “significantly” improve government deficits.

However, it added that changes in taxation and spending needed to be treated with caution “given the substantial downside risks to growth and upside risks to inflation”.

“Tax and spending measures should also aim to further support growth potential, complementing ongoing structural reforms such as overhauling infrastructure planning and simplifying financial services regulation.”

Globally, the OECD said the world economy has been “resilient” this year, although growth is expected to slow in 2026.

The agency expects the global economy to grow by 3.2% this year before slowing to 2.9% in 2026, a forecast unchanged from its previous forecast. Growth is expected to rebound slightly to 3.1% in 2027.

However, it warned that the outlook “remains fragile”. Any further rise in trade barriers could “cause significant damage to supply chains and global output,” the report said.

It also warned of the risk of the AI ​​bubble bursting, noting that there was a risk of “potential sudden price corrections” given the high share prices of some companies.