Global Pressures Weigh on Britain's Economy, Economic Bodies Warn
The OECD has trimmed its growth forecast for Britain while the IMF's chief called on governments to summon the courage to tackle rising debt costs before next month's Budget
Two influential economic bodies have warned that Britain's ballooning debt costs and slower growth leave the country in a tougher position ahead of Chancellor John Healey's first Budget next month. The UK is one of several countries facing downgraded growth forecasts in a report published on Wednesday by the Organisation for Economic Co-operation and Development. The head of the International Monetary Fund also told the BBC that Britain and the United States needed "the courage" to take action on debt.
Rising borrowing costs are limiting governments' room for manoeuvre as pressure grows for more spending on defence and support for people facing price rises. The OECD said it expected the UK economy to grow by 1% next year, slightly less than the 1.1% it had been forecasting for 2027. However, it said Britain had proved more resilient than expected in 2026, and upgraded its forecast for growth this year from 0.9% to 1.1%. Taken together, higher growth in 2026 but marginally lower growth in 2027 amounts to an upgrade in the growth forecast for the UK.
Meanwhile, 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" but that governments had taken "no action to contain that service cost". She said it was "time to take that action", adding that politicians needed "courage" to take the necessary steps.
The ongoing conflict in the Middle East and Russia's war in Ukraine have pushed up the cost of crude oil, leading to higher fuel and energy costs, which in turn have driven up inflation around the world. These price pressures helped push up the cost of borrowing for governments, contributing to an unexpected surge in government borrowing in August. Finding extra money to cover higher interest payments on government debt is adding to the pressure on the Chancellor ahead of October's Budget.
Prime Minister Andy Burnham has made easing the cost of living for households one of his key aims, while the government is under pressure to spend more on defence. However, Burnham and Healey have pledged to stick to Labour's manifesto commitments on tax and the government's self-imposed fiscal rules.
The OECD said the war in the Middle East and climate-change related supply shocks presented risks to the global economy but emphasised that there was "considerable uncertainty" around its outlook. The scale of the impact from higher fuel prices next year would depend on how long supply disruptions lasted, it said. Stockpiles of oil and supplies from outside the Gulf states had helped cushion the effects on economies so far. The OECD lowered its global growth forecast for next year from 3.1% to 3%. Growth prospects for Australia, Canada and the euro area were downgraded, although the US forecast is now slightly higher.
As well as military conflicts, weather-related shocks, including from a strong El Niño, could hit farmers and help push up food prices, the OECD said. In addition, tariffs and export restrictions on trade continue to add to uncertainty.
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". He added: "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."