Public debt and trade tensions weaken UK economic growth, OECD says

UK economic growth will suffer because of US tariff barriers and high interest payments on government debt, an influential global policy group has said.

The Organization for Economic Co-operation and Development (OECD) cut its expectations for UK growth this year to 1.3% from the 1.4% it had predicted in March.

The think tank has cut forecasts globally due to trade tensions, but said the UK faced particular issues due to its “very thin” buffer in public finances, calling on Chancellor Rachel Reeves to boost tax take and cut spending.

“Strengthening the public finances remains a priority… including through the upcoming Spending Review,” the OECD said.

Next week, Reeves will set out her Spending Review where she faces tough choices on allocating departmental budgets.

The government has already committed billions of pounds to defence, while the NHS is also expected to be a focus amid Labour’s pledge to reduce waiting lists.

In March, Reeves was forced to announce £14bn in measures, including £4.8bn in welfare cuts, to restore headroom against her self-imposed fiscal rules.

While the OECD highlighted better-than-expected UK economic growth, which strengthened to 0.7% between January and March, it cautioned that “momentum is weakening” due to “deteriorating” business sentiment.

It forecast the UK economy would expand by 1% in 2026, compared to the 1.2% it pencilled in a few months ago.

“The state of the public finances is a significant downside risk to the outlook if the fiscal rules are to be met,” the OECD said.

It suggested that Reeves should adopt a “balanced approach” of “targeted spending cuts” and tax increases to improve the UK’s public finances.

It suggested closing tax loopholes and re-evaluating council tax bands based on updated property values.

Under the current system, council tax in England is calculated based on the price the property would have sold for in April 1991. For Wales, it is evaluated on property prices in April 2003.

Meanwhile, worldwide growth is now expected to slow to a “modest” 2.9%, down from a previous forecast of 3.1%, the OECD said.

It blamed a “significant” rise in trade barriers and warned that “weakened economic prospects will be felt around the world, with almost no exception”.

The OECD’s comments come as Bank of England governor Andrew Bailey told a Treasury Select Committee on Wednesday that the global system of trade agreements had been “blown up to a considerable degree” by global trade tensions.

Since US President Donald Trump returned to the White House, a long list of countries have been targeted by tariffs, but Trump’s unpredictable approach to implementing the measures has created widespread uncertainty.

“We are forecasting basically a downgrade for almost everybody,” Alvaro Pereira, the OECD’s chief economist told the BBC.

“We’ll have a lot less growth and job creation than we had forecasted in the past.”

The group also slashed the outlook for the US economy this year from 2.2% to 1.6% and predicted growth would slow again in 2026.

It warned that the US was at risk from rising inflation, something that Trump repeatedly promised would fall during his presidential campaign.

Prior to the release of the OECD report on Tuesday, Trump wrote on social media: “Because of Tariffs, our Economy is BOOMING!”

However, the most recent official data showed the US economy shrank at an annual rate of 0.2% in the first three months of this year, the first contraction since 2022.