UK economy to be weighed on by government policy and tax moves, OECD says

Higher tax and spending cuts are set to drag on UK growth next year, adding to a hit from US President Donald Trump’s tariff hikes and one of the highest inflation rates among the G7 economies, a new report has warned.

The Organisation of Economic Co-operation and Development (OECD) said Britain’s “tighter fiscal stance”, meaning higher taxes and reduced government spending, is expected to weigh on the economy, with growth set to ease sharply from 1.4% this year to 1% in 2026.

Economists from the influential organisation also predicted that UK inflation will surge, with Britain experiencing the highest level among the G7 group of advanced economies this year.

Inflation in the UK is expected to reach 3.5% in 2025, 0.4 percentage points higher than its previous forecast, and still remaining far above the Bank of England’s target in 2026, at 2.7%, with soaring food prices pushing up the cost of living.

This would see the UK suffering the second highest rate of inflation in the G7 next year, behind only the US, according to the report.

While the OECD nudged up its 2025 forecast for UK gross domestic product (GDP) from the 1.3% it predicted in June, it kept the outlook unchanged for 2026 in what will mean a steep pull back in growth over the year ahead.

In its interim economic outlook, it said the UK would be held back by “a tighter fiscal stance, higher trade costs and uncertainty” which it said would “drag on external and domestic demand”.

It comes ahead of the Government’s autumn Budget statement in November, with the Chancellor under pressure to further raise taxes to help balance the books.

Chancellor Rachel Reeves said the figures “confirm that the British economy is stronger than forecast – it has been the fastest growing of any G7 economy in the first half of the year”.

She added: “But I know there is more to do to build an economy that works for working people – and rewards working people. That is what I’m determined we deliver through our plan for change.”

The UK economy grew by 0.7% over the first three months of the year and by 0.3% over the second quarter, official figures show.

Shadow chancellor Sir Mel Stride said the OECD’s data showed “Britain is in a high tax, high inflation, low growth doom loop,” adding that the UK was “now teetering on the edge of stagflation”.

The OECD’s chief economist Alvaro Pereira said it was “certainly not our working assumption” that the UK will experience stagflation – referring to a combination of stagnant economic growth and high inflation.

He added that growth was forecast to pick up this year while inflation was set to come down.

The OECD also warned that growth in the world’s economy will noticeably weaken over the rest of the year as higher US tariffs take effect, dampening global trade and investment.

The global economy was stronger than expected over the first half of 2025 but activity will “soften noticeably in the second half of this year”, it said.

This is partly due to “front-loading” delivering a boost to goods production and trade – referring to a rush of imports over the first half.

This has happened as businesses made more shipments as they tried to get ahead of steeper levies on their exports, as a result of Mr Trump’s policy changes.

It meant industrial production growth outpaced 2024’s average in most advanced economies over the first half of 2025, the OECD found.

Strong levels of investment in technology sectors, particularly artificial intelligence (AI), also bolstered activity in the US and Japan.

But as front-loading grinds to a halt, higher tariffs take effect, and lingering uncertainties dampen investment and trade, economic growth is expected to slow.

Trade between the US and China, the world’s two largest economies, has declined sharply in recent months, the OECD said.

The OECD’s secretary-general Mathias Cormann said that a “sustained trade war would have no winners, it would only have losers”.

The organisation views it as “very important for countries to reduce trade tensions”, he said.

Global GDP is projected to decrease from 3.3% in 2024 to 3.2% in 2025, and 2.9% in 2026.

However, 2025’s figure is 0.3 percentage points higher than the OECD’s previous forecast set out in June.

The OECD said spending and tax choices for governments around the world should be focused on the “need to strengthen sustainable economic growth while preserving adequate support for those in need”.

It also recommended that central banks should stay “vigilant” but continue cutting interest rates where inflation is on a downward path.