UK economic outlook upgraded but Chancellor faces challenges – OECD

The UK’s economic outlook is “gradually” improving but the Chancellor must look at urgent reforms to get growth and finances back on track, according to a new report.

In its annual economic survey, the Organisation for Economic Co-operation and Development (OECD) upgraded its forecasts for UK growth to 1.1% in 2024 and 1.2% in 2025.

This marks an improvement on the paltry 0.1% expansion seen in 2023 and is higher than the OECD’s last predictions in May for growth of 0.4% in 2024 and 1% in 2025.

The OECD urged Chancellor Rachel Reeves to not just raise taxes but look at wider reforms of the tax system ahead of the upcoming Budget in October.

The report comes after the latest official figures from the UK’s Office for National Statistics (ONS) estimated zero growth for the second month running in July.

Strong growth

The OECD said strong growth in wages and falling inflation has been spurring on the economy after a tough past few years and a recession at the tail end of 2023.

It said: “The country’s economic outlook is gradually improving.”

The group added: “Economic activity picked up in 2024 following a significant slowdown since late 2021.

“A key driver of post-pandemic growth, private consumption was held back by high inflation, until nominal wage growth caught up in the second half of 2023 to deliver real wage increases.”

The OECD signalled it did not expect a flurry of interest rate cuts, following the quarter-point reduction to 5% in August, given that inflation needs to be kept in check.

It said: “Headline inflation is moderating towards target, but core inflation is projected to stay elevated, requiring monetary policy to remain restrictive until inflation returns durably to the 2% target.

“Economic growth is projected to pick up as the effect of past monetary tightening wanes.”

While growth is picking up, the OECD said the new Labour government needs to look at reforms to address long-term challenges in the UK.

“The UK faces a challenging economic environment of high interest rates and low growth limiting macroeconomic policy options,” according to the report.

“Recent economic shocks, shared across countries, magnified long-existing challenges in the UK, raising the urgency for the Government to continue supply-side reforms and stimulate growth potential.”

Tax reforms will be key, it said.

“While raising taxes will help to finance necessary spending, the Government has to shift to solutions that make the tax system fairer and more effective to avoid unnecessary economic distortions, in particular with respect to investment and labour supply,” the OECD said.

“Identifying ways to make the tax system fairer, reduce distortions and close loopholes will be key to support revenues over the longer term.”