The latest projections from the Organisation for Economic Co-operation and Development (OECD) indicate a significant slowdown in growth for the United Kingdom, revising its previous forecasts amid rising global prices and the impacts of U.S. trade policies under former President Donald Trump. The OECD now anticipates that the UK economy will grow by just 1.3% in 2025 and 1.0% in 2026, a downward revision from earlier estimates of 1.4% and 1.2%, respectively. This adjustment follows a warning from the OECD that the UK’s economic momentum is faltering, as both business sentiment and consumer confidence continue to decline.
In its latest report, the Paris-based organization attributed the diminished growth forecast not only to domestic factors but also to external pressures. Higher interest payments on government debt are expected to burden the fiscal landscape, adding strain that will likely push public debt levels upwards. Furthermore, the OECD noted that tariffs imposed during Trump’s administration have exacerbated this situation, with the average effective tariff faced by UK goods exported to the U.S. rising by nearly eight percentage points since the beginning of the year. These elements are projected to substantially hinder economic growth across the country.
Despite the disheartening figures, the UK is poised to outpace several major economies, including France, Germany, and Japan, according to the OECD. The global economic outlook has also been downgraded, with the organization forecasting growth of just 2.9% for 2025 and 2026—the first time since the COVID-19 pandemic that anticipated growth has dipped below the 3% threshold.
The report also scrutinized the UK government’s fiscal policies. Strict adherence to fiscal rules currently in place, championed by Chancellor Rachel Reeves, has been criticized by the OECD as posing a “significant downside risk” to the UK’s economic future. The organization emphasized that these rigid rules create “very thin fiscal buffers,” which could prove inadequate in the face of potential economic shocks. Currently, the UK’s fiscal objectives include achieving a balanced or surplus budget by 2029/30, reducing net financial debt as a share of the economy by the same date, and limiting spending on social security—and half of welfare spending—to below £194.5 billion.
Economists and financial commentators have voiced concerns that rigid fiscal rules unnecessarily restrict public finances, thereby limiting the government’s borrowing capacity. The Office for Budget Responsibility (OBR), which serves as the UK’s fiscal watchdog, has forecasted just £9.9 billion in fiscal headroom, a figure constrained by Reeves’ adherence to these stringent rules.
To address the pressures stemming from meager fiscal buffers, the OECD has urged the UK government to enhance its public finances through a series of policy measures. It advocates for a balanced approach that could incorporate a range of strategies, including targeted spending cuts, the elimination of tax loopholes, and adjustments in taxation. Suggested revenue-raising measures involve reevaluating council tax bands based on current property values, as well as addressing existing distortions within the UK tax system.
Moreover, the OECD called on the government to bolster investment and reinvigorate productivity by focusing on supply-side policies. As the Treasury gears up for the forthcoming spending review, set to be published on June 11, the implications of these downgrades in fiscal and growth forecasts will be top of mind. This review will outline departmental budgets for the next three years, and mitigating weak economic growth presents a complex challenge for Treasury officials tasked with balancing expenditure without resorting to tax increases.
Compounding these fiscal challenges, the International Monetary Fund (IMF) recently suggested that potential “refinements” to the current fiscal rules could avert the need for repeated spending cuts or tax hikes. Such adjustments, if adopted by Reeves, might provide political leeway to shift fiscal policies in response to the changing economic landscape. While the Chancellor has previously termed the fiscal framework as “ironclad,” she committed during her election campaign not to alter them, raising questions about the future direction of the UK’s fiscal strategy.
As the global economic environment remains increasingly unpredictable, the UK faces critical decisions both in terms of short-term responses to immediate financial pressures and longer-term strategies for sustainable growth. The ongoing dialogue surrounding fiscal rules will likely take on heightened significance, given the interconnected nature of domestic challenges and international economic dynamics. Stakeholders from various sectors will continue to watch closely, weighing the implications of these revisions and recommendations on future policymaking efforts.