OECD says UK needs tougher fiscal policy amid tax cut talk

By Suban Abdulla

LONDON (Reuters) – Britain’s government should tighten its budgetary belt, the OECD said on Wednesday, advice that is unlikely to be welcomed by Prime Minister Rishi Sunak who is expected to cut taxes again before a 2024 election.

A week after finance minister Jeremy Hunt announced tax sweeteners for workers and businesses, the Organisation for Economic Co-operation and Development said the government should do more to shore up the public finances after the huge hits from the COVID pandemic and last year’s energy price surge.

“Maintaining and strengthening current fiscal efforts is essential against the challenging backdrop of high borrowing and debt, and as higher debt interest payments have eroded fiscal headroom,” the OECD said in a report on the world economy.

Sunak and Hunt are expected to offer another round of tax giveaways in a budget plan expected in February or March to help close the opposition Labour Party’s lead over the ruling Conservatives in opinion polls.

The OECD recommended reforming Britain’s triple-lock system for increasing state pensions by whichever is the highest of workers’ earnings, consumer price inflation (CPI) or 2.5%.

“Reforming the costly triple-lock uprating of state pensions would help, by indexing pensions to an average of CPI and wage inflation, and by providing direct transfers to poor pensioners to mitigate poverty risks,” it said.

The OECD also recommended reforms to increase the number of people seeking work in Britain’s tight labour market and make the planning system to help the country meet its net zero targets.

The group forecast gross domestic product (GDP) to grow 0.7% next year – down slightly from its previous forecast of 0.8% – and by 1.2% in 2025. Both forecasts were roughly in line with those for Germany and France.

The OECD’s forecast of 0.5% growth in Britain’s economy in 2023 represented an upgrade of its September forecast of 0.3% but was the second-weakest performance among its Group of Seven peers after Germany.

It said it expected the Bank of England would keep interest rates unchanged at 5.25% until 2025 when they would start a drop to 4% by the end of that year. Financial markets are currently fully pricing a first quarter-point rate cut in August 2024.

(Reporting by Suban Abdulla; Editing by William Schomberg)