OECD: Rachel Reeves’ ‘insufficient’ fiscal headroom poses risk to UK economy
The OECD has warned Rachel Reeves’ wafer thin fiscal headroom poses a significant risk to the UK economy as it cut its growth outlook for Britain in 2025 and 2026.
The economic organisation urged the Treasury to “step up” efforts to bolster its “very thin” fiscal headroom, expressing concern that it could cause “significant downside risk” to the UK economy.
“Currently very thin fiscal buffers could be insufficient to provide adequate support without breaching the fiscal rules in the event of renewed adverse shocks,” the OECD said.
“Efforts to rebuild buffers should be stepped up in the face of strongly constrained budgetary policy.
“Strengthening the public finances remains a priority.”
Business sentiment ‘rapidly deteriorating’
The OECD downgraded its estimate for the UK’s growth this year to 1.3 per cent from 1.4 per cent and to 1 per cent from 1.2 per cent in 2026, well below the 1.9 per cent forecast by the OBR.
“Momentum is weakening, with business sentiment rapidly deteriorating,” the group said, adding that consumer confidence had continued to decline.
“The drag on external demand, private consumption and business investment is projected to more than offset the positive effects of last autumn’s budgetary measures on government consumption and investment.”
Despite the downgrade, the UK’s growth would remain the second fastest-growing economy in the G7 across 2025 and 2026 after the US, the OECD said, but it cautioned that UK inflation was set to rise to 3.1 per cent in 2025, the highest among major European economies. Interest rates were projected to fall to 3.5 per cent by the second half of next year.
The organisation urged Rachel Reeves to take a “balanced approach” to managing fiscal policy, which should combine “targeted spending cuts” as well as revenue raising moves such as an update to the council tax rules to realign with house price growth across the country.
‘Wafer thin’ fiscal headroom
The remarks add the OECD to a growing list of economic research groups urging Reeves to increase her narrow £9.9bn fiscal headroom, significantly lower than what has been set by her predecessors in government.
Last month, a report by the National Institute of Economic and Social Research (NIESR) said uncertainty brought about by the fiscal rules was causing more harm to business confidence than global trade tensions brought about by Donald Trump.
“Endless speculation about the size of the government’s fiscal head room is entirely self-inflicted. It is the result of arbitrary fiscal rules that have served the country poorly,” the report said.
NIESR senior economist Ben Caswell said the government’s “wafer thin” £9.9bn fiscal headroom, and the fact that sudden changes had to be made in the Spring Statement to stay within target, has led to businesses putting off investment decisions on the expectation that further tax hikes were on the way.
Tax rises in the Autumn?
He told City AM: “If you’re making these adjustments every six months, everyone is just waiting until the next six months until you give them more clarity.”
“A lot of businesses are thinking, “in the Autumn Budget in 2025 are we going to have a repeat of the Spring Statement? Is she going to fall short again? Is she going to have to raise taxes? Am I going to get hit again?””
“The true root of the problem is that the UK has issues in its own domestic economy. We can’t just pivot and place the blame on Trump.”