OECD Signals that UK Government is unlikely to be able to achieve tax cuts

Organisation for Economic Cooperation and Development warned the UK Government that it had “little fiscal room” for giveaways. This could dampen the hopes of tax cuts ahead of the next election.

The Paris-based institute said in its latest biannual Economic Outlook that the UK’s debt levels leave the public finances “significantly vulnerable to changes in interest rates”. To meet the rules of his fiscal policy, the government must maintain a “restrictive fiscal stance” over the period 2023-24.

Clare Lombardelli was the chief economist of the UK Treasury before she took up the same position at the OECD. She left the Exchequer after Jeremy Hunt’s budget in March.

Rishi Sunak, the Prime Minister, has said he would like to enter an election that is expected to take place next year with tax cuts for businesses and households. He has little room to maneuver against his fiscal rule that aims to reduce debt as a percentage of GDP. Now, with rates rising since March, the debt servicing costs are a major obstacle.

The OECD report also stated that the government’s decision to freeze income tax thresholds will force 1.7 million people to pay income taxes, and another 1.2 millions people to higher rates by 2026.

In an apparent reference post-Brexit agreements with the European Union, the outlook also urges the government to resolve the uncertainty surrounding trade relationships. The outlook praised Hunt for his “ambitious childcare reforms” to encourage more women into employment.

The OECD stated that “swiftly implementing measures in the Spring Budget to increase the labor supply, and providing certainty to investment and trade is key to strengthening the potential growth.”

According to the forecast, UK rates of interest will increase to 4.75% for at least one year in order to combat inflation. However, household living standards are expected to stagnate for several more months.

The OECD upgraded its growth forecasts and said that the UK will avoid recession. However, the UK economy still is expected to grow slower than any other Group of Seven country except Germany in the next two years. The UK unemployment rate is expected to rise to 4.5%, up from 3.9%. The UK is expected to grow by 0.3% in this year’s output and by 1% next year.

Victoria Atkins, Treasury Minister and speaker on the Bloomberg UK Politics podcast, said that the outlook for growth was “in the right direction”. When we consider the G-7 in its entirety, it is fair to say that everyone has faced these global challenges.

The wages will remain stagnant for the remainder of this year, despite a gradual decline in inflation. By the end of 2024 headline inflation will have returned to the 2% target, but core inflation, which is currently 3.2%, will remain high. The OECD predicts that underlying inflation will be even higher in Italy, France, and Germany.

According to the OECD, as the price pressures subside in the second half 2024, the BOE can cut rates to 4.25%.