Tax rises and tighter spending to hold back UK growth, OECD says

Tax rises and constraints on government spending will weigh on growth in the UK's economy, according to an influential global policy group.

UK inflation will also remain among the highest of the G7 advanced economies, although it is expected to ease, the Organization for Economic Co-operation and Development (OECD) said.

The OECD forecast the UK economy would be "steady" with growth of 1.4% this year before slowing to 1.2% in 2026, although its prediction 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, including a freeze on income tax thresholds.

The UK will be the second-fastest growing economy in the G7 this year, behind the US, the OECD predicts, and the third fastest in 2026 when it is overtaken by Canada.

While UK growth is expected to slow next year, the rate is forecast to edge up to 1.3% in 2027.

However, the OECD's forecasts are more pessimistic than those of the UK government's official forecaster, the Office for Budget Responsibility, which expects 1.5% growth this year, 1.4% next year and 1.5% in 2027.

"Fiscal consolidation will be a headwind to the economy, with past tax and spending adjustments weighing on household disposable income and slowing consumption," the OECD said.

"Sluggish" productivity and "weak" growth in the working-age population, which was partly due to slowing inward migration, would "continue to act as a drag on the economy", it added.

However, it expects the economy to get a slight boost in late 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 OECD's previous forecast, but the highest in the G7. The inflation rate is then predicted to drop to 2.5% next year, down from its previous estimate of 2.7%.

Unemployment is set to rise to 4.9% in 2026, the OECD says, and to 5% in 2027.

Reacting to the OECD's report, Chancellor Rachel Reeves 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 choices that I made at the Budget are expected to cut inflation by 0.4 percentage points, helping cut the cost of living for households and costs for our businesses."

Shadow chancellor Mel Stride said: "Rachel Reeves promised growth but growth is expected to weaken next year, because of her choices. This is the cost of policies that punish work, businesses and investment."

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 government deficit should improve "substantially", but it added that care needed to be taken with changes to tax and spending "given 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 the overhaul of infrastructure planning and the simplification of financial services regulation."

On a global basis, the OECD said the world's economy had been "resilient" this year, although growth is expected to slow in 2026.

The body expects the global economy to grow by 3.2% this year, before slowing to 2.9% in 2026 - estimates that are unchanged from its previous forecast. It then expects a small rebound in growth to 3.1% in 2027.

However, it warns that the outlook "remains fragile". Any further rises in trade barriers could "inflict significant damage on supply chains and global output", it says.

It also warns of a risk from the AI bubble bursting, noting there is a risk "of potentially abrupt price corrections" given the high share prices for some companies. The Bank of England has issued a similar warning.

The US economy is forecast to grow more strongly than previously expected. The OECD expects 2% growth this year, revised up from 1.8% in September, and 1.7% in 2026, up from 1.5%.