London, December 02, 2025
The Organisation for Economic Co-operation and Development (OECD) has projected a slowdown in the United Kingdom’s economic growth, forecasting GDP expansion to moderate to 1.2% in 2026 due to tax increases and tighter government spending aimed at fiscal consolidation.
OECD’s Growth Projection for the UK
The OECD warns that the UK’s economic momentum will be restrained as fiscal policies shift towards gradually reducing pandemic and energy crisis-related support. The consolidation effort, which includes rising taxes and spending cuts, is expected to curb growth and help restore inflation targets and fiscal room for manoeuvre.
Fiscal Context and Challenges
The UK had implemented substantial fiscal measures to mitigate the pandemic’s economic impact and the surge in energy costs. Now, the government faces the challenge of tightening fiscal policy without derailing the recovery. This delicate balance is further complicated by demographic pressures from an ageing population and the need for significant investments to support the country’s transition to a net-zero economy. Structural reforms in taxation are highlighted as essential for sustainable revenue generation.
Supply-Side Reforms and Labour Market Measures
To counterbalance fiscal tightening, the OECD strongly advocates for supply-side reforms. These include clarifying taxation and land use regulations to encourage private investment and implementing policies to increase labour supply by reducing economic inactivity. Such measures are intended to enhance productivity and counteract growth headwinds.
Commitment to Net Zero and Environmental Policy
The UK continues to be at the forefront among OECD countries in its commitment to reach net zero greenhouse gas emissions by 2050. However, the OECD underscores the need for more focused policies to accelerate emissions reductions, particularly in residential housing. Clear strategies, pricing incentives, regulatory frameworks, and supportive financial mechanisms are pointed out as critical for advancing the decarbonisation agenda.
Global Economic Environment
The UK’s economic outlook is also influenced by broader global trends. OECD forecasts indicate a modest slowdown in global GDP growth through 2026, reflecting worldwide macroeconomic pressures and the impacts of tightening policies across major economies.
The OECD’s forecast signals that while fiscal consolidation is necessary to secure the UK’s economic stability and inflation targets, it will likely moderate growth in the near term. This underscores the importance for policymakers and business leaders to complement fiscal measures with structural reforms aimed at boosting productivity and labour market participation, thereby supporting a more resilient economic future.