The Organisation for Economic Cooperation and Development has warned the UK government it has “little fiscal space” for giveaways in comments that may dampen hopes for tax cuts before the next election.
(Bloomberg) — The Organisation for Economic Cooperation and Development has warned the UK government it has “little fiscal space” for giveaways in comments that may dampen hopes for tax cuts before the next election.
In its latest biannual Economic Outlook, the Paris-based institution said the size of the Britain’s national debt leaves the public finances “significantly exposed to movements in interest rates.” To meet his fiscal rules, the government will need to keep the fiscal stance “restrictive over 2023-24,” it added.
The conclusion is particularly pointed because the forecast was prepared by Clare Lombardelli, the former chief economist at the UK Treasury who took the same role at the OECD in May. She left after Chancellor of the Exchequer Jeremy Hunt’s March budget.
Prime Minister Rishi Sunak has hinted he wants to go into an election, expected to be held next year, having cut taxes for households and businesses. However, he has barely any room against his main fiscal rule to get debt falling as a share of GDP and is now fighting the additional headwind over higher debt servicing costs as rates have risen since March.
The OECD paper also noted that the government’s decision to freeze tax thresholds is set to push 1.7 million people into paying income taxes and another 1.2 million people into higher rates by 2026.
The outlook also urged urge the government to resolve uncertainty around trade relationships, in an apparent reference to post-Brexit arrangements with the European Union. It praised Hunt’s “ambitious” childcare reforms to bring more women into the workforce.
“Swiftly implementing the Spring budget’s measures to increase labor supply and providing certainty for investment and trade are key to strengthening potential growth,” the OECD said.
Under the forecast, UK interest rates will rise to 4.75% and remain there for at least a year to curb inflation but household living standards will stagnate for many more months.
The OECD said the UK would escape recession as it upgraded the growth outlook, but the UK economy is still forecast to grow more slowly than any other Group of Seven nation except Germany over the coming two years. UK unemployment is likely to climb to 4.5% from 3.9%. It expects UK output will expand 0.3% this year and 1% in 2024.
Wages will stagnate for the rest of this year despite a gradual fall in inflation. Headline inflation will be back at the 2% target by the end of 2024, but core inflation will remain high, at 3.2%. However, the OECD expects underlying inflation to be even more sticky in Italy, France and Germany.
Under the OECD’s outlook, the BOE will be able to cut rates to 4.25% in the second half of 2024 as price pressures recede.
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