The OECD has significantly updated its UK growth forecasts, giving credit to Rachel Reeves’ £70bn-a-year public spending package.
The UK economy is now expected to grow by 0.9% in 2024 and 1.7% in 2025, up from May forecasts of 0.4% and 1.0%. But the Paris-based organization warned that this growth comes at the expense of high public debt and persistent inflation.
The UK’s economic upgrade contrasts sharply with the credit downgrades of France, Germany and Italy, highlighting the recession in the euro zone’s largest economies. However, the OECD noted that growth in Britain is being fueled by an unprecedented increase in government spending, which has pushed debt to an unsustainable level that is expected to exceed 100% of GDP.
The OECD warned that this fiscal stimulus would keep inflation above the Bank of England’s 2% target for the next two years, driven by wage pressures and higher public spending. Despite expectations that interest rates will fall to 3.5% by early 2026, monetary policy could remain tighter for longer to counter persistent price pressures.
The organization also highlighted the UK’s shrinking workforce as a critical challenge. Britain saw one of the largest post-pandemic contractions in labor force participation among OECD countries, second only to Costa Rica. The OECD stressed the need for benefits reforms and increased support for childcare to encourage more people, especially women, to return to work.
While Reeves welcomed the growth upgrade, positioning the UK as the fastest-growing European economy in the G7 over the next three years, the OECD urged policymakers to strike a balance between fiscal stimulus and sustainable debt management.
The Chancellor’s first budget, financed by £40bn of tax rises and borrowing, also included a commitment to reform planning laws, support for childcare and social care systems to boost productivity and living standards. However, critics warn that the long-term consequences of higher borrowing costs and structural deficits could overshadow these short-term gains.