Officials have sounded an alarm that the UK’s economic landscape is on the verge of a storm. The recently released OECD Going for Growth 2023 certainly bolsters this forecast. As the new Chancellor Rachel Reeves is discovering, she is going to face heavy scrutiny. She’s putting forward tax increases and spending cuts that will kill growth in the next year. A hoped-for resurgence by 2027 seems unlikely. Yet short-term hurdles continue, with inflation still the highest among G7 countries.
Chancellor Reeves announced a Budget that includes tax increases totaling £26 billion over the next five years and a freeze on income tax thresholds. Mel Stride condemned these decisions, arguing, “Rachel Reeves has promised growth but she is making decisions that will undermine it next year. These are anti-work, anti-business, anti-investment policies and that is the true cost of this.”
The OECD has warned that UK growth will deteriorate next year. Forecasts await a fall to 1.3%. They are optimistic, forecasting a rebound that would bring growth as high as 3.1% in 2027. Fitch Ratings for one is projecting that the economy will receive a modest jolt in late 2026. Much of this positive turnaround is attributed to lower interest rates.
More than a year on, inflation continues to be the most pressing and alarming issue facing the UK. Today’s long-term rate is forecast at 3.5%, with predictions to decrease to 2.5% next year. This inflation rate is significantly the highest inflation rate of any G7 country. Chancellor Reeves pointed to the impact of her recent Budget on inflation. She asserted it would reduce inflation by 0.4 percentage points, which would reduce the cost of living for families and businesses alike.
The OECD raised its long-term growth outlook for the UK. Much to our surprise, this year, the UK is on course to be the second-fastest growing economy in the G7, only behind the US. In a separate report, the OECD recorded a “gradual” upturn in global trade, which should help boost the overall state of the economy going forward.
The OECD’s latest Going for Growth report sounded a serious alarm. It argued that tax increases paired with spending cuts would be too damaging to economic growth. They warned that further fiscal consolidation would cause “lasting harm to global supply chains and output.” The report highlights that adjustments to tax and spending policies have historically affected household disposable income, leading to slower consumption rates.
Reeves has been under significant public pressure since she first delivered her Budget. Critics say her economic decisions all but secure the country’s long-term growth prospects.
“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.” – Chancellor Rachel Reeves
While the UK is staring into these economic abyss, officials are still banking on an improvement in growth numbers by 2027. The pathway forward must be paved by diligent efforts to balance inflationary pressures with appropriate fiscal strategies, so that we might cultivate a more peaceful economic landscape for all.