The Organisation for Economic Cooperation and Development (OECD) has delivered a mixed assessment of the UK's economic prospects, upgrading its growth forecast for 2025 while issuing a stark warning about the impact of government tax and spending plans on household finances.
Growth Upgraded Amid European Stagnation
In its latest report, the Paris-based thinktank predicted the UK economy will expand by 1.2% next year. This represents an upgrade from a previous forecast of 1% and offers a boost to Chancellor Rachel Reeves. The UK's projected growth rate is now set to outstrip those of Europe's largest economies, with France, Germany, and Italy each forecast to grow by less than 1% in 2025.
However, this upgraded figure still marks a slowdown from the 1.4% growth predicted for 2024. The OECD's global outlook suggests a return to lower, stagnant rates of expansion across much of the industrialised world, with the US economy expected to grow by 1.7% in 2025, down from 2.4% in 2024.
Fiscal Policy to Act as a 'Headwind' for Households
Despite the relatively positive growth comparison, the OECD analysis contained a significant caution for the Chancellor. The report stated that the government's policy of 'fiscal consolidation' – a combination of higher taxes and restrained public spending – will act as a headwind.
Analysts specifically warned that 'past tax and spending adjustments' are likely to weigh heavily on household disposable income, which will in turn slow down consumer expenditure. This follows Chancellor Reeves's first budget, which included around £26bn in tax rises, such as a freeze on income tax thresholds. The Office for Budget Responsibility (OBR) estimates this will pull 1.7 million more people into higher tax brackets, pushing the overall tax burden to a record high.
Broader Economic Context and Challenges
The OECD report was published against a backdrop of political and economic turbulence in the UK. It emerged just a day after Richard Hughes, the chair of the OBR, resigned following a dispute with the Treasury over budget leaks and the portrayal of the public finances.
Globally, the OECD pointed to higher trade barriers and significant policy uncertainty as key risks. It noted that while activity has been resilient this year due to factors like AI investment and front-loaded trade, global growth is expected to slow from 3.3% in 2024 to 3.2% in 2025. OECD Secretary General Mathias Cormann emphasised the need for 'constructive dialogue between countries' to resolve trade tensions, in an apparent rebuke to protectionist policies advocated by figures like Donald Trump.
For the UK, the path forward involves a delicate balance. The Chancellor welcomed the OECD's growth upgrade and its prediction that inflation would gradually return to the 2% target, allowing for interest rate cuts. Yet, the central challenge remains: fostering economic growth while fiscal policy simultaneously constrains the spending power of consumers, who are a primary driver of that very growth.
