Rachel Reeves has been urged to increase taxes and cut public spending after the UK’s growth forecast was downgraded amid rising prices and the impact of Donald Trump’s trade war.
The Organisation for Economic Co-operation and Development (OECD) has warned the chancellor to “step up” efforts to bolster the ‘headroom’ in the nation’s finances.
And it calls on her to start to act within days – including in next week’s Spending Review, which will outline government spending for the coming years.
It comes just hours after the defence secretary failed to rule out tax rises to make Britain’s ‘war ready’, amid concerns that the government has not properly funded to transform the Armed Forces outlined in a major defence review.
John Healey said the government would “set out how we’ll pay for future increases in the future” when he was quizzed on Labour’s ambition to boost defence spending to 3 per cent of the country’s gross domestic product.
Ms Reeves is alreday under pressure to find up to £5bn for pensioners’ fuel bills, after a U-turn on the Winter Fuel Allowance, and to scrap the controversial two-child benefit cap.
A new report by the OECD warns the government: “Currently very thin fiscal buffers could be insufficient to provide adequate support without breaching the fiscal rules in the event of renewed adverse shocks.”
“Efforts to rebuild buffers should be stepped up,” it tells the chancellor.
The OECD also downgraded its estimate for the UK’s economic growth this year to 1.3 per cent, from 1.4 per cent, and to 1 per cent, from 1.2 per cent, in 2026.
The report adds: “Strengthening the public finances remains a priority… including through the upcoming spending review.”
It says that a “balanced approach” should combine “targeted spending cuts, including closing tax loopholes; revenue-raising measures such as re-evaluating council tax bands based on updated property values; and the removal of distortions in the tax system”.
It also calls for the “swift” implementation of “pro-work reforms to the welfare state… while protecting the most vulnerable”.
Just hours after the OECD’s report was released the governor of the Bank of England Andrew Bailey warned MPs that the speed at which UK interest rates can be cut is “shrouded in a lot more uncertainty” because of an “unpredictable” global economic situation and a US-China trade war.
Last month rates were cut for the fourth time in a year, to 4.25 per cent, and while the trajectory “remains downwards… how far and how quickly is now shrouded in a lot more uncertainty,” he told MPs on the Commons Treasury Committee.
Mr Bailey warned that Mr Trump’s tariffs had led to many businesses “putting off of investment decisions”.
The Business secretary Jonathan Reynolds is set to meet his US counterpart, Jamieson Greer, after a summit of OECD trade ministers in Paris on Tuesday.
Mr Reynolds is pressing the US to agree a timeline to lift tariffs which were supposed to be scrapped under a UK-US trade deal announced with great fanfare earlier this month. However, it has yet to be implemented.
Labour ministers are now in a race against time to secure a deal to prevent Mr Trump’s swingeing new 50 per cent tariffs on steel hitting an already beleaguered critical industry.
The US president sent shockwaves through the global economy on Friday when he announced that he would raise the tariffs, doubling the 25 per cent he announced in March, from Wednesday.
Earlier this month President Trump and Keir Starmer both hailed the trade agreement between the two countries as a “great deal”.
Under its terms, levies on steel and aluminium were to be reduced to zero.
However, a general 10 per cent tariff for other goods would remain and Britain agreed to scrap its tariff on ethanol coming into the UK from the US.
The Conservative leader, Kemi Badenoch, claimed the UK had been “shafted” as she contrasted the amount UK business would have to pay with their costs before President Trump came to power.
