Jeremy Hunt's recent National Insurance cuts have “only partially offset the ongoing financial burden”; Photo: MANDEL NGAN/AFP via Getty Images
High taxes and interest rates will make the UK the slowest-growing economy in the G7 next year, the Organization for Economic Co-operation and Development (OECD) predicts.
Economists at the Paris-based group cut their UK forecast on Thursday, predicting GDP will grow just 0.4% this year and 1% in 2025, as high borrowing costs and taxes weigh on the economy.
The forecast for next year is the worst of any major advanced economy in the OECD and nearly half the 1.8% growth expected in the United States.
Forecasters blamed high taxes and interest rates, and also on a rapidly growing public economy. costs of containing Britain.
The OECD said: “Social security spending will increase by more than 1% of GDP, mainly due to the triple lock on pensions and the increased burden on health-related benefits… Tax revenues continue to rise to a historical high of around 37% of GDP.”
The group said Chancellor Jeremy Hunt's recent cuts to national insurance spending “will only partially offset the ongoing financial burden from frozen personal income tax thresholds.”
Meanwhile, the decision to make temporary business investment tax relief permanent “will less than fully offset the increase in the statutory corporation tax rate.”
Mr Hunt blamed the UK's weak economic growth prospects on the need to fight inflation with more high interest rates.
He said: “This forecast is not particularly surprising given that our priority last year was to fight inflation with higher interest rates.”
“But now we're winning this war, growth matters and that's why it's so important.” Crucially, last month the IMF predicted that the UK will grow faster over the next six years than any European G7 country or Japan.
“To keep this going, we need to stick to our plan – competitive taxes , flexible work, marketization and far-reaching welfare reform.”
The OECD welcomed the chancellor's cuts to national insurance as a sensible measure to encourage more people into work, but said more needed to be done to tackle unemployment.
They said: “Further progress on reforms in proposals while avoiding politics.” out-migration is necessary to increase potential growth, especially by continuing to combat economic inactivity and stagnant investment.”
On the current path, Treasury spending will be 2.9 percentage points of GDP higher by 2029 than pre-pandemic levels. , the OECD said.
In addition to rising pension and healthcare costs, British finances are also under pressure from the Bank of England's losses under its quantitative easing scheme. Taxpayers are forced to cover these losses, and payments made under the agreement rose to more than 1.5% of GDP last year. This is much higher than the 1 percent paid in the US or the 0.9 percent in the eurozone.
This creates a worrying economic outlook for Sir Keir Starmer as he seeks to take office in the upcoming general election. If he is successful, as current polls suggest, the Labor leader looks set to take control of a weak economy that has little fiscal room to further increase spending or cut taxes.
The OECD has warned that governments around the world are at risk as they continue to borrow to finance rising health and pension costs.
It said: “The financial situation is worrying in the medium to long term. Governments must address rising debt and growing spending needs due to aging populations, climate change mitigation and defense needs.
“Increasing debt servicing costs further deteriorate financial sustainability. There is never a good time to do this, but the conditions make it possible to start the recovery now.”
The OECD said pensions should be cut to shore up finances. It said past experience shows that the only way to sustainably reduce government spending is to target “politically sensitive areas such as pensions, civil servant wages and subsidies, and cuts in public investment.”
Separately, the Institute On Thursday the government warned that Whitehall departments face a “cliff” to their finances in December as current plans based on the 2021 spending review expire in April 2025.
With no updated budgets to go through The IFG government said it would be difficult for departments to plan their spending effectively.
The government said the next review would not take place until after the general election.
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