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Rachel Reeves warns that after leaving the “very thin” financial buffer, there is a risk of violating budget rules, as the OECD urged the UK Prime Minister to increase tax revenue.
The OECD on Tuesday cut the UK’s growth forecast and called on the Labour Government to step up efforts to strengthen its wavy rooms in its budget when the UK faces “substantial shortcoming risks to growth.”
The UK’s economic momentum is weakening, the OECD said in its latest global outlook as it reduced its 2025 growth forecast to 1.3% from 1.4% in March. The output increased by just 1% in 2026, with the OECD being added softer than previous 1.2% forecasts.
The Paris-based OECD said a “balanced approach” to finance should combine targeted spending cuts with new tax measures. These include “revenue measures such as revaluing the council’s tax band based on updated asset values,” and removing tax “distortions.”
“Fiscal situation is a significant negative risk to the outlook if fiscal rules are met,” the intergovernmental organization said. “Currently, very thin fiscal buffers may not be sufficient to provide adequate support without violating fiscal rules if an unfavourable impact is updated.”
The minister is circulating budgets for the sparse sector ahead of the government’s spending review next week, and Downing Street is also following a call from Backbench Labour MPs to ease planned welfare cuts. Pressure on Reeves could intensify in line with the fall budget, especially if budget liability is downgrading growth forecasts.
The UK Treasury will face continued tensions due to higher debt interest payments, the OECD said. The government’s total debt is projected to increase in its share of GDP over the next two years, and is projected to exceed 104% in 2026 compared to 101.3% in 2024.
“To tackle all these issues, you need to work on both the revenue side and the spending side, especially if you already have very high debt. So it’s very important to be able to stick to fiscal rules and maintain financial discipline.”
According to the OECD, inflation rates exceeded the 3.1% target before it subsided at 3.1% this year to 2.3%. However, given the inactive growth, the Bank of England should be able to cut its key interest rates from 4.25% to 3.5% in the second quarter of 2026.
“The momentum is weakening and business sentiment is rapidly worsening,” the OECD said, adding that consumer confidence is “depressed.” Meanwhile, even after the trade deal struck between the Trump administration and Kielstarmer’s government, the investigation measures for the new export order plummeted given the rise in tariffs facing exports to the UK.
“The UK has been the fastest growing economy in the G7 for the first three months of the year, with interest rates being cut four times, but we know there’s more to do,” Reeves said. “I am determined to go faster, to put more money in people’s pockets, through planning for change.”
