Growth, Debt, and Challenges
The OECD has revised its growth forecast for the UK upwards, crediting Chancellor Rachel Reeves' £70 billion public spending package. The UK economy is now expected to grow by 0.9% in 2024 and 1.7% in 2025, compared to previous forecasts of 0.4% and 1.0%. However, this growth comes with concerns about rising public debt and persistent inflation.
This positive outlook contrasts with downgrades for other major European economies like France, Germany, and Italy. However, the OECD highlights that the UK's growth is fueled by an unprecedented increase in government spending, pushing debt to an unsustainable level projected to exceed 100% of GDP.
The OECD warns that this fiscal stimulus will keep inflation above the Bank of England's 2% target for the next two years. Despite expectations of interest rate reductions, monetary policy could remain tighter for longer to counteract persistent price pressures.
Another critical challenge identified by the OECD is the UK's shrinking labor force. The UK has witnessed one of the largest post-pandemic contractions in workforce participation among OECD nations, second only to Costa Rica. The OECD emphasizes the need for benefit reforms and increased childcare support to encourage more people, particularly women, to return to work.
While Chancellor Reeves welcomes the growth upgrade, positioning the UK as the fastest-growing European economy in the G7 over the next three years, the OECD urges policymakers to balance fiscal stimulus with sustainable debt management.
Reeves' maiden Budget, funded through £40 billion in tax hikes and borrowing, also includes commitments to reforming planning laws, childcare support, and welfare 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.