UK has limited room for pre-election tax cuts, OECD says

By William Schomberg

LONDON (Reuters) -The government of British Prime Minister Rishi Sunak has little room to cut taxes ahead of the next national election expected in 2024, the Organisation for Economic Co-operation and Development (OECD) said on Wednesday.

The OECD raised its growth projections for Britain’s economy in its latest set of forecasts for member countries, echoing a move last month by the International Monetary Fund which revised away a recession it had previously expected.

The Paris-based OECD said Britain’s growth would remain moderate and its inflation rate would be the highest among developed economies this year, pinching households and ramping up borrowing costs, before falling in 2024.

“Monetary policy will remain tight, increasingly weighing on output and lowering inflation, and the fiscal stance will be restrictive over 2023-24,” it said. “However, little fiscal space is left, leaving the government significantly exposed to movements in interest rates.”

Sunak and his finance minister Jeremy Hunt say they would like to cut taxes when possible – something many members of their Conservative Party want before a national election expected in 2024 – but their main priority is to halve inflation this year.

Britain’s headline inflation rate was set to be 6.9% in 2023, higher than Germany’s 6.3% and France’s 6.1% and the OECD average of 6.6%, the OECD’s new projections showed.

If correct, that could test Sunak’s promise to halve inflation this year although the OECD did not say what it expected the pace of price growth to be at the end of 2023 and its forecast represented an average for the whole year.

The OECD said it expected British inflation to slow to 2.8% in 2024, lower than in France and Germany.

Hunt pointed to improved forecasts from the OECD for the economy which it now expected to grow by 0.3% in 2023 and 1.0% in 2024.

Previously the OECD had expected the economy to shrink by 0.2% this year and grow by 0.9% next year.

“Today’s report boosts our growth forecast, praises our action to help parents back to work with a major expansion of free childcare, and recognises our cuts to business taxes which aim to drive investment,” Hunt said in a statement.

“But while inflation is still too high, we must stick relentlessly to our plan to halve it this year. That is the only long term way to grow the economy and ease the cost of living pressures on families.”

The OECD said the government to should swiftly implement its plans to boost the number of people available to work, including more spending on childcare, and “providing certainty for investment and trade are key to strengthening potential growth.”

Britain’s economy is still struggling to adjust to post-Brexit trade rules after its departure from the European Union.

(Writing by William Schomberg Editing by William James and Mark Potter)

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