Interest rates to stay higher for longer because of Labour’s monster tax and spend Budget, OECD warns_Nhy
Brits face interest rates staying higher for longer after Labour’s huge tax, borrow and spend Budget, the OECD said today.
In its annual economic survey, the international body predicted that both the base rate and inflation will be above previous expectations.
The OECD also trimmed the forecast for UK growth this year from 1.1 per cent to 0.9 per cent – although it said activity would accelerate after that due to Rachel Reeves‘ state spending bonanza.
And it cautioned that the government will need to ‘mobilise additional revenue’ by closing tax loopholes to balance the books.
The assessment came after the Chancellor repeatedly refused to repeat her commitment that taxes will not be hiked again.
The OECD trimmed the forecast for UK growth this year from 1.1 per cent to 0.9 per cent – although it said activity would accelerate after that due to Rachel Reeves ‘ state spending bonanz
In its annual economic survey, the international body predicted that both UK interest rates and inflation will be above previous expectations
In her October 30 package Ms Reeves set out plans for almost £70billion a year of extra public spending, funded through tax rises and increased borrowing.
The OECD said interest rates, which currently sit at 4.75 per cent, are likely to fall back to 3.5 per cent by early 2026.
However, higher consumption, partly caused by the autumn Budget, meant the drop would not be as sharp as previously forecast.
The report said: ‘Fiscal policy will be tightening over 2024-26, though by less than expected, with significant fiscal loosening in the tax, spending, and borrowing package announced at the autumn Budget.’
The OECD has pencilled in headline inflation of 2.7 per cent for next year.
It had previously pointed towards inflation of 2.4 per cent for 2025.
The rate is expected to fall to 2.3 per cent in 2026, but that is still above the Bank of England’s 2 per cent target.
Meanwhile, UK GDP is predicted to rise by 0.9 per cent this year, a downgrade from 1.1 per cent after recent official figures showed the economy stalling in the third quarter.
‘Momentum is positive nevertheless, with retail sales on an upward trend since early 2024,’ the report added.
GDP growth is now projected to strengthen to 1.7 per cent next year as it is ‘boosted by the large increase in public expenditure set out in the autumn budget’.
That will fall back to 1.3 per cent in 2026.
The OECD said the UK remains vulnerable to an increase in energy prices
Previously, the OECD had forecast 1.2 per cent GDP growth for 2025.
The OECD suggested that Ms Reeves promises of no more tax rises might prove difficult to keep.
‘Rebuilding fiscal buffers and continuing to mobilise additional revenue, including by closing loopholes and reducing distortions in the tax system, is necessary to ensure fiscal sustainability,’ the report said.
It added: ‘With limited fiscal buffers, possible external shocks that would require fiscal support are a significant downside risk to the outlook.
‘These include increases in global energy prices, given UK households’ reliance on natural gas.
‘Moreover, persistent price pressures on the back of the strong increase in government expenditure and uncertainty about the degree of slack in the labour market could require the monetary stance to remain tighter for longer.’
Ms Reeves said today: ‘Growth is our number one priority, and the OECD upgrade will mean the UK is the fastest growing European economy in the G7 over the next three years.
‘That is only the start. Growth only matters if it’s matched by more money in people’s pockets.
‘That is why we protected people’s payslips from higher taxes at the Budget and are determined to deliver growth that benefits households and improves living standards.
‘This government will get our economy growing, with our National Wealth Fund, reforming the remits of our regulators and pension mega funds to attract better investment, as well as reforming our planning laws – all so that we can rebuild Britain for good.’
The OECD said the global economy would ‘remain resilient’ over the coming years but that ‘risks and uncertainties are high’.
World GDP is predicted to grow by 3.2 per cent this year and 3.3 per cent next year.
That is a slight improvement from the 3.1 per cent and 3.2 per cent from its September interim report.