OECD Puts Britain at Bottom of G-7 Growth League Next Year

Philip Aldrick, Bloomberg News

, Source: Office for Budget Responsibility

(Bloomberg) -- Britain will grow more slowly next year than any other major advanced economy as stealth taxes and high interest rates squeeze the economy, the latest forecasts from the OECD show.

The Paris-based organization downgraded its UK forecasts for both 2024 and 2025 citing “tighter macroeconomic policy” settings, including fiscal drag from frozen personal income-tax thresholds, as well as stickier inflation this year.

Britain is projected to expand 0.4% in 2024, just ahead of last-placed Germany in the Group of Seven, and by 1% in 2025 — the weakest performance among the club of rich nations. At the OECD’s last update in February, the UK was middle of the pack with growth of 0.7% this year and 1.2% next.

The forecasts will come as a blow for Prime Minister Rishi Sunak as he faces potentially make-or-break local elections. Sunak has made the economy a centerpiece of his campaign.

The OECD outlook is more pessimistic than those from both the International Monetary Fund and the UK’s Office for Budget Responsibility, which forecast 2025 growth of 1.5% and 1.9% respectively.

“This forecast is not particularly surprising given our priority for the last year has been to tackle inflation with higher interest rates,” Chancellor Jeremy Hunt said in a statement.

“But now we are winning that war, growth matters, which is why it is significant that last month the IMF predicted the UK will grow faster over the next 6 years than any European G-7 country or Japan,” he added. “To sustain that we need to stick to our plan - competitive taxes, a flexible labor market and far-reaching welfare reform.”

The outlook was prepared by Clare Lombardelli, the OECD’s chief economist. In February, she was appointed deputy governor at the Bank of England, starting in July.

The OECD welcomed the combination of tighter fiscal and monetary policy, urging the UK to hold the line “until inflation returns durably” to the 2% target.

Inflation hit 11.1% in 2022 but is down to 3.2% and the OECD expects it to average 2.7% this year and 2.3% in 2025. Core inflation is projected to remain above 3% this year and unemployment to pick up to 4.7% in 2025 from 4.2% now.

To get there interest rates will remain elevated at 3.75% at the end of 2025, but below the current 5.25%, the OECD expects. That is significantly higher than the 2.5% rates the OECD forecasts for the eurozone at the end of 2025, which accounts for some of the UK’s underperformance.

The OECD said there was quite a large fiscal tightening between 2023 and 2025 of 1.3% of potential GDP, as “tax receipts keep rising towards historic highs.” A 4 percentage point cut to national insurance contributions, a payroll tax, since 2023 only partially offsets the revenue raised from freezing thresholds as more workers are dragged into higher tax bands.

The OECD noted that large-scale migration since the pandemic had lifted UK GDP but depressed output per head. It also urged the government to reform property taxation by re-evaluating council tax bands and scrapping stamp duty, a tax on homebuying. Hunt has said he came close to changing stamp duty in the March budget.