UK growth to be reined in by public finance squeeze, OECD warns

U.K. economic growth is expected to be stifled by an ongoing squeeze on the country’s public finances, the Organisation for Economic Cooperation and Development (OECD) said on Tuesday.

The U.K. is expected to grow 1.3% in 2025 before slowing to 1% in 2026, the OECD said in its latest global economic outlook report, “dampened by heightened trade tensions, tighter financial conditions, and elevated uncertainty.”

The organization projected that growth will “remain modest,” impacted by bolstered trade tensions and uncertainty surrounding consumer confidence and business sentiment.

“The drag on external demand, private consumption, and business investment is projected to more than offset the positive effects of last autumn’s budgetary measures on government consumption and investment,” the OECD said.

While the budget deficit is expected to improve from 5.3% in 2025 to 4.5% in 2026, according to OECD forecasts, debt interest spending remains high. Public debt is set to continue rising and to reach 104% of GDP [gross domestic product] in 2026, the OECD said.

The Labour government and Finance Minister Rachel Reeves have repeatedly said their priority is to boost growth and get the country’s public finances in order. In government spending plans announced last October, Reeves committed to self-imposed fiscal rules that day-to-day spending must be met by tax revenues, pledging public debt will fall as a share of economic output by 2029-30.

She has repeatedly said the fiscal rules are “non-negotiable” despite the measures leaving her little wiggle room to act in the case of unexpected economic shocks, amid lackluster growth for the U.K., higher borrowing costs and wider global trade tensions and uncertainty for businesses.

While the OECD agreed that “fiscal prudence is required as the monetary stance is easing gradually,” it cautioned that “efforts to rebuild buffers should be stepped up in the face of strongly constrained budgetary policy and substantial downward risks to growth, while productivity-enhancing public investments should be preserved.”

The government’s “very thin fiscal buffers” might not prove sufficient to offer support without breaching fiscal rules if further shocks materialize.

The report comes just over a week ahead of U.K. Chancellor Rachel Reeves delivering her first “Spending Review,” in which she will set out long-term public spending plans for government departments.

Since coming to power just over a year ago, the Labour government has already announced a raft of welfare spending cuts, employer tax rises and planning reforms designed to reduce red tape and boost infrastructure projects and housing development. It also announced an increase in defense spending to 2.5% of GDP by 2027 that will be funded through cuts in overseas aid.

After restricting public borrowing and ruling out further tax rises, there is now mounting speculation that Reeves could announce further budget cuts in the spending review on June 11.

The OECD urged the government to stick to its plans to strengthen public finances and to deliver on its ambitious fiscal plans, including through the upcoming review.

“A balanced approach should combine targeted spending cuts, including closing tax loopholes; revenue-raising measures such as re-evaluating council tax bands based on updated property values; and the removal of distortions in the tax system,” it noted.

It also called on the U.K. to reverse a decline in labor market participation by implementing pro-work reforms to the welfare state “while protecting the most vulnerable.”