By Suban Abdulla
LONDON, Dec 2 (Reuters) – Britain’s economy will grow faster than previously expected next year, the OECD said on Tuesday, citing the impact of finance minister Rachel Reeves’ budget on consumption and drag from global uncertainty that could keep pressure on inflation.
The Paris-based organisation raised its 2026 forecast for British growth to 1.2% from 1% in its previous forecast in September. It sees gross domestic product expanding 1.3% in 2027.
“Continuing to ensure that consolidation is carefully timed, given substantial downside risks to growth and upside risks to inflation, and well-calibrated, with a combination of revenue-raising measures and spending cuts, is essential,” the OECD said in its latest global outlook.
Reeves announced increases to government spending in her November 26 budget, paid for by higher state borrowing and hiking taxes on workers, people saving for pensions and investors.
Welcoming the OECD forecasts of higher growth and slower inflation, Reeves reiterated that her budget would cut borrowing and debt, help with the costs of living for households, and reduce costs for businesses.
The OECD expects Britain’s government deficit to remain large, but to narrow from 5.9% of GDP in 2025 to 5.1% in 2027, with total revenue reaching 40% of economic output.
INFLATION TO SLOW BUT HEADWINDS REMAIN
It said consumer price inflation was likely to average 3.5% this year – higher than in any other G7 country – before easing to 2.5% in 2026 and to 2.1% in 2027.
The inflation forecast for next year was in line with estimates from Britain’s budget watchdog, published last week.
“Elevated inflation expectations and potential second-round effects from increases in payroll taxes and the minimum wage, as well as from high food inflation, constitute an upside risk to prices,” the OECD said, adding this could prompt the Bank of England to keep interest rates higher for longer, and pose a downside risk to economic growth.
An OECD official said Reeves’ budget increased short-term spending while delaying the planned tax rises, echoing concerns from analysts last week who questioned whether the government would still go through with such fiscal tightening closer to the national election, due by mid-2029.
“The new budget has a consolidation path that is somewhat more back-loaded than we had expected. There are increases in spending that are relatively front-loaded,” the OECD’s director of country studies, Luiz de Mello, told a press conference after the report was published.
The report said past tax and spending adjustments would weigh on household disposable incomes and would slow consumption.
It said continued fiscal consolidation, sluggish productivity and weak working-age population growth, partly due to slowing inward migration, would all prove a drag on growth.
With public finances stretched, the OECD said Britain had limited capacity to deal with potential economic shocks in the future.
(Reporting by Suban Abdulla in London, additional reporting by Leigh Thomas in Paris; editing by Andy Bruce and Gareth Jones)
