UK Economy Faces Growth Downgrade as Fiscal Rules Are Put at Risk

The Organisation for Economic Co-operation and Development (OECD) has issued a warning that the UK’s economy faces significant risks to its fiscal rules amid deteriorating growth prospects. The chancellor, Rachel Reeves, has been cautioned that ongoing economic challenges could sharply reduce the government’s ability to meet its deficit reduction targets, leaving fiscal buffers at critically low levels.

In its latest economic outlook, the OECD has revised the UK’s growth forecast for this year and next. It now predicts a 1.3 per cent growth rate for 2025, down from 1.4 per cent, while next year’s growth is expected to decline further to just 1 per cent. This downgrading reflects rising trade uncertainty, persistently high interest rates, and plunging confidence among both businesses and households.

As Reeves prepares for her upcoming spending review, the OECD has highlighted the precarious state of the UK’s fiscal position. A thin buffer of less than £10 billion separates the government from breaching its primary fiscal rule: balancing day-to-day spending with tax revenues by the end of the current parliament. The report stressed that even minor economic shocks could render these rules unattainable.

The OECD has urged the government to strengthen the country’s public finances through a balanced approach in the forthcoming spending review. Recommendations include targeted spending reductions, closing tax loopholes, and restructuring the council tax system to reflect updated property values. The organisation also proposed removing inefficiencies from the wider tax framework, alongside carefully considered revenue-raising measures.

Despite expectations that the UK’s budget deficit will shrink from 6 per cent in 2024 to 4.5 per cent in 2025 due to rising tax receipts, higher borrowing costs and interest rates could see national debt climb to 104 per cent of GDP by 2026. The OECD also pointed to the urgent need for supply-side reforms, which include overhauling the National Planning Policy Framework to improve the country’s productivity and ease long-term fiscal pressures.

On a global scale, the OECD reported subdued economic prospects, forecasting global growth to slow to 2.9 per cent for the year compared to an earlier projection of 3.3 per cent. The United States is expected to fare worse, with growth expected to slow sharply following the introduction of new trade tariffs, which have also contributed to broader uncertainty impacting the UK’s economic outlook.