Rachel Reeves was yesterday given a fresh growth headache as the OECD downgraded its UK outlook and warned the Chancellor to act with ‘prudence’ on the public finances.
Britain’s economy is expected to grow by just 1.3 per cent this year, down from a previous forecast of 1.4 per cent, according to the Paris-based Organisation for Economic Cooperation and Development.
And growth for next year is pencilled in at 1 per cent, down from 1.2 per cent.
‘Momentum is weakening, with business sentiment rapidly deteriorating,’ the OECD said, adding that the state of the public finances posed a ‘significant downside risk’.
It urged Ms Reeves not to loosen the purse strings, cautioning that she only had a ‘very thin’ amount of wiggle room left to balance the books.
The OECD also warned that stubborn inflation – fuelled by Labour’s national insurance and minimum wage hikes – could force the Bank of England to leave interest rates higher for longer.
Low growth: The OECD has urged Chancellor Rachel Reeves (pictured) not to loosen the purse strings, cautioning that she only had a ‘very thin’ amount of wiggle room
It came as Bank governor Andrew Bailey cast doubt on official figures showing that Britain enjoyed the strongest start to the year of any member of the G7 group of advanced economies.
Mr Bailey told MPs that evidence from businesses painted a much weaker picture Office for National Statistics data pointing to growth of 0.7 per cent in the first quarter of 2025.
‘The surveys are nothing like as strong as that,’ he told the Treasury select committee.
‘My own visits around the country are somewhat supporting the survey evidence.’
The darkening outlook will add to speculation that Ms Reeves will stage another big tax raid.
Yesterday, analysts at Deutsche Bank said they expected ‘upwards of £10billion in tax rises to be announced in the autumn Budget‘.
It comes as the Chancellor comes under intense pressure from Cabinet colleagues and Labour’s Left ahead of the government’s spending review this month.
The government is being urged to reverse winter fuel payment and child benefit cuts and dole out big spending rises, notably for defence.
But Ms Reeves was urged by the OECD to stand firm.
It pointed to the ‘substantial’ interest payments on Britain’s debt pile that are weighing further on the public finances.
In its latest global economic outlook, the OECD said: ‘Fiscal prudence is required… strengthening the public finances remains a priority.’
The report said that Britain’s ‘currently very thin fiscal buffers’ could prove ‘insufficient’ if the Chancellor wanted to stimulate the economy in the event of fresh shocks.
It called for ‘targeted spending cuts’ as well as tax reforms.
The report comes just a week after a similar call from the International Monetary Fund (IMF) to ‘stay the course’ in bringing the public finances under control.
Responding to the OECD, Ms Reeves said: ‘Delivering economic growth and improving living standards is my number one mission.’
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