OECD Urges UK Government to Tighten Budget Amidst Tax Cut Plans Ahead of 2024 Election

The OECD's stance is rooted in the necessity of bolstering the nation's public finances, which have been severely impacted by the COVID-19 pandemic and last year's energy price surge.

The Organisation for Economic Co-operation and Development (OECD) has advised the UK government to tighten its fiscal belt, a suggestion that may not sit well with Prime Minister Rishi Sunak, who is contemplating further tax cuts in the run-up to the 2024 election.

This recommendation comes just a week after Finance Minister Jeremy Hunt unveiled tax incentives for both workers and businesses.

The OECD’s stance is rooted in the necessity of bolstering the nation’s public finances, which have been severely impacted by the COVID-19 pandemic and last year’s energy price surge.

In its report on the global economy, the OECD emphasized the importance of maintaining and strengthening current fiscal efforts, given the backdrop of elevated borrowing and debt levels.

It pointed out that higher debt interest payments have eroded fiscal flexibility.

Sunak and Hunt are expected to unveil additional tax incentives in a budget proposal scheduled for February or March, aimed at narrowing the Labour Party’s lead over the Conservatives in opinion polls.

One of the OECD’s key recommendations is reforming the UK’s triple-lock system for increasing state pensions, which currently bases adjustments on the highest of workers’ earnings, consumer price inflation (CPI), or a fixed 2.5%.

The organization proposed indexing pensions to an average of CPI and wage inflation, while also providing direct support to low-income pensioners to mitigate poverty risks.

Furthermore, the OECD suggested reforms to stimulate greater workforce participation in the UK’s tight labor market and to enhance the country’s planning system to meet its net-zero emissions targets.

The organization forecasted a GDP growth rate of 0.7% for the UK in the coming year, a slight dip from its previous estimate of 0.8%, with a projected growth of 1.2% in 2025, aligning closely with predictions for Germany and France.

Although the OECD’s forecast for a 0.5% expansion in the UK’s economy in 2023 represents an improvement over its earlier estimate of 0.3%, it still ranks as the second-weakest performance among the Group of Seven nations, surpassing only Germany.

The organization anticipated that the Bank of England would maintain interest rates at 5.25% until 2025, followed by a gradual decline to 4% by year-end 2025.

Presently, financial markets fully anticipate a quarter-point rate reduction in August 2024.