Economy to slow next year as Reeves tax hikes batter Britain

The UK is economy is set to slow next year as tax hikes and global uncertainty take their toll, the Organisation for Economic Cooperation and Development (OECD) has warned.

In a bleak assessment less than a week after Rachel Reeves’s Budget, the Paris-based body forecast that growth of 1.4 per cent this year would fall to an even more sluggish 1.2 per cent in 2026.

At the same time, households will face a continued cost of living squeeze – with inflation this year on course to be the highest in the G7 group of advanced economies at 3.5 per cent and next year still a stubbornly high 2.5 per cent.

‘Momentum is softening,’ the Paris-based OECD said, pointing to the ‘continued effect of budgetary tightening on consumption’.

That tightening has come mainly from tax hikes, which over the course of the Chancellor’ first two Budgets amount to a record £68 billion.

The growth forecast represents a slight upgrade for next year from the OECD which previously forecast just 1 per cent expansion for 2026.

But it still leaves the Prime Minister far off his ambition to make Britain the fastest growing economy in the G7 – as Donald Trump’s United States is set to grow by 2 per cent.

Britain will grow at the same rate as the sclerotic eurozone next year but fall behind in 2027, according to the OECD. 

Outside the G7, European economies Greece and Spain are also expected to do better than Britain – each growing by 2.2 per cent.

The OECD report gives little room for optimism that the Chancellor will be able to take the brakes off the economy any time soon – warning that tax and spending policy ‘will remain restrictive given high government borrowing costs’.

‘Rising defence and related security and intelligence spending and the steady increase in debt interest will keep adding pressure on public finances,’ it added.

The OECD said it was ‘essential’ that the UK uses ‘a combination of revenue-raising measures and spending cuts’ to tackle its deteriorating public finances – in sharp contrast with Ms Reeves’s Budget strategy of relying heavily on tax hikes while splurging billions more on welfare. 

Meanwhile, Britain’s manufacturing sector has been weakened by higher tariffs on exports to the US, despite a bilateral trade agreement between the two countries earlier this year, it said.

The forecasts were published as part of the Paris-based OECD’s economic outlook, which predicts that global growth will slow from 3.2 per cent this year to 2.9 per cent in 2026.

It said the world economy had so far been ‘resilient’ in the face of global trade wars but that the impact of higher tariffs would start to feed through to higher prices and weaker household spending and business investment.

Shadow chancellor Sir Mel Stride said: ‘The OECD are clear: unemployment is set to rise, driven in part by Labour’s jobs tax, and inflation will stay above target for the rest of their forecast.

‘Rachel Reeves promised growth but growth is expected to weaken next year, because of her choices. This is the cost of policies that punish work, businesses and investment.

‘Labour have no backbone and no idea how to get the economy moving. Only the Conservatives will give businesses the environment to grow, including by scrapping business rates for thousands of pubs, restaurants and shops on our high streets.’

Ms Reeves said: ‘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.’