The UK has been warned of escalating debt costs and weakening economic growth as Chancellor John Healey prepares to deliver his first Budget next month.
In a report published on Wednesday, the Organisation for Economic Co-operation and Development (OECD) downgraded its growth forecast for the UK economy for next year, now expecting expansion of 1% compared with a previous estimate of 1.1%.
However, the OECD noted that the UK has demonstrated greater resilience than anticipated this year, upgrading its 2025 growth forecast from 0.9% to 1.1%.
Separately, International Monetary Fund (IMF) head Kristalina Georgieva told the BBC on Tuesday that global economic shocks had been “pushing debt levels up like a staircase not to heaven,” yet governments had taken “no action to contain that service cost.”
“[It’s] time to take that action,” she said, adding that “courage” was needed by politicians to implement the necessary measures.
The ongoing conflict in the Middle East and the war in Ukraine have driven up crude oil prices, fuelling higher fuel and energy costs and pushing inflation upward worldwide.
Rising inflation has also increased the cost of servicing government debt, and an unexpected surge in government borrowing in August has added further pressure on Healey.
The UK economy will grow by slightly less than expected next year, according to the OECD, which now expects 1% growth rather than 1.1%.
Meanwhile, Prime Minister Andy Burnham has made easing the cost of living for households a key priority, though the government faces pressure to increase defence spending.
Burnham and Healey face a difficult balancing act, attempting to offer more support to households while honouring Labour’s manifesto commitments on tax and the government’s self-imposed fiscal rules.
The OECD said the impact of higher fuel prices next year depends on how long supply disruptions persist. Stockpiles of oil and supplies from outside the Gulf states have helped cushion the effects on economies so far.
Risks to the global economy include the war in the Middle East and climate-related supply shocks, the OECD said. Weather-related shocks, including from a strong El Niño, could hit farmers and push up food prices, it added.
In addition, tariffs and export restrictions on trade continue to add to uncertainty. New US tariffs from July as part of the Trump administration’s ongoing volatile trade policy have raised its effective tariff rate by 1%.
Next year, global growth is expected to be 0.1% lower, with countries affected including Australia, Canada, and the Euro-area.
Chief Secretary to the Treasury Emma Reynolds said: “Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience.”
She added that the government is “already giving families space to breathe” and “starting the big, long-term changes needed to create good jobs and growth in every postcode”.
However, Conservative shadow chancellor Andrew Griffith said the OECD urges countries to “control spending and improve public sector efficiency”.
“Instead, this government is trying to find new ways to tax you whilst having to pay interest rates on their borrowing which are the highest in the G7,” he said.
