UK Economic Growth Forecasted to Remain Modest
The Organisation for Economic Cooperation and Development (OECD) projects the United Kingdom's economic growth to remain modest over the next two years, constrained by ongoing pressures on public finances and wider economic uncertainties.
According to the OECD, UK growth is expected to reach 1.3% in 2025 before decelerating to 1.0% in 2026. Several factors contribute to this restrained outlook, including heightened trade tensions, tighter financial conditions, and elevated uncertainty impacting consumer and business confidence.
Public Finances Under Pressure
Despite an anticipated improvement in the budget deficit—from 5.3% of GDP in 2025 to 4.5% in 2026—the UK's public finances face persistent challenges. Interest payments on national debt remain substantial, with public debt projected to increase and reach 104% of GDP by 2026.
The OECD highlights that the dampening effect on external demand, private consumption, and business investment is expected to offset the government’s fiscal stimulus measures, which include increased consumption and investment initiated during the last budget.
Government Fiscal Strategy and Challenges
The current Labour government prioritizes economic growth alongside restoring fiscal balance. Finance Minister Rachel Reeves has committed to self-imposed fiscal rules requiring day-to-day government spending to be fully covered by tax revenues, aiming to reduce the debt-to-GDP ratio by 2029-30.
Despite these commitments, the narrow fiscal flexibility leaves limited room to maneuver in the face of unexpected economic shocks, especially given the prevailing weak growth, rising borrowing costs, and global trade uncertainties. The OECD agrees on the need for fiscal prudence amid gradual monetary easing but urges the government to strengthen fiscal buffers to mitigate significant downside risks.
The OECD warns that the UK’s current thin fiscal buffers may be insufficient to provide adequate support without violating fiscal rules if further economic shocks occur.
Impending Spending Review and Policy Recommendations
With the Chancellor's upcoming Spending Review scheduled for June 11, the OECD calls for adherence to fiscal consolidation plans and the delivery of ambitious reforms. The review will set long-term spending priorities for government departments and could potentially include further budgetary adjustments.
Since assuming office, the government has implemented several measures such as employer tax increases, planning reforms aimed at reducing regulatory barriers, support for infrastructure and housing development, and an increase in defense spending targetted at 2.5% of GDP by 2027, financed through cuts to overseas aid.
The OECD recommends a balanced policy approach combining:
- Targeted spending cuts, including the closure of tax loopholes
- Revenue-raising measures, such as revaluation of council tax bands based on updated property values
- Elimination of distortions within the tax system
Additionally, the organization highlights the importance of reversing declining labor market participation via pro-work reforms to the welfare system while ensuring protection for vulnerable populations.
Conclusion
The OECD’s projections emphasize the challenges facing the UK economy as it navigates modest growth prospects amid tight fiscal constraints and external uncertainties. The upcoming Spending Review will be critical in defining the government's approach to balancing growth stimulation with fiscal responsibility.
