The Organisation for Economic Co-operation and Development (OECD) has warned that unemployment rates in the United Kingdom are expected to increase, with numbers approaching levels last seen during the COVID-19 pandemic.
The advisory comes amid a series of government tax increases and continued economic pressures. According to the Paris-based economic body, higher employer National Insurance contributions and other tax measures may further impact the labour market, with the total number of unemployed potentially reaching around two million in the near future.
The OECD also flagged a subdued outlook for UK economic growth and elevated inflation rates.
Economic Outlook for the UK
The OECD projects that UK economic growth will slow significantly over the coming years. GDP is forecast to expand by just 1.4 percent in 2025, falling to 1.2 percent in 2026 and slightly improving to 1.3 percent in 2027.
These figures suggest only a moderate recovery following a period of expansion attributed in part to businesses bringing forward activity in anticipation of tax and tariff changes earlier this year. The OECD noted that this initial surge is unlikely to continue, expecting more restrained growth as macroeconomic conditions tighten.
Labour Market Pressures and Jobless Rates
Official data indicates that the UK unemployment rate stands at approximately 5 percent, with forecasts suggesting it could rise further as policy changes take effect.
The OECD report underscored that current legislation, including the proposed workers’ rights bill, might contribute to further reductions in employment. Unemployment numbers are forecast to reach pandemic-era highs of near two million, reflecting the combined impact of slowing growth and increased business costs from tax changes.
Inflation Trends and Monetary Policy
Inflation remains a central concern, with the OECD predicting that price rises will stay above the Bank of England’s 2 percent target until the end of 2027. The current year’s average inflation rate of 3.5 percent is the highest among G7 nations, which the OECD compares to levels observed in emerging markets rather than the UK’s European peers.
In response, the Bank of England is expected to reduce interest rates cautiously, with only two possible cuts next year, potentially bringing rates down to 3.5 percent. Policymakers are likely to keep borrowing costs elevated to combat ongoing price pressures.
Fiscal Policy and Public Spending Challenges
The OECD report highlighted that the UK’s reliance on higher taxation to balance government spending poses risks to both growth and living standards.
It raised particular concern about the potential economic impact of raising spending commitments up front (front-loading) while offsetting them with delayed tax increases (backloading). High interest payments on public debt and calls for greater defence expenditure are expected to add further strain to the nation’s finances.
The organisation emphasised the importance of ensuring that tax and spending adjustments are carefully timed and executed to avoid jeopardising the economic recovery.
OECD Recommendations for Economic Stability
To navigate these challenges, the OECD advised the UK to pursue a balanced approach to fiscal consolidation, combining revenue-raising measures with carefully managed spending reductions.
The report warned that “elevated inflation expectations and potential second-round effects from payroll tax increases, adjustments to the minimum wage, and persistent food inflation” could push prices higher, requiring a “tighter monetary stance for longer” and posing a “downside risk to output”.
Final Summary
The OECD’s latest outlook for the UK warns of growing pressures on the labour market as unemployment rises and economic growth slows. Ongoing high inflation, tightening monetary policy, and the challenges of balancing government finances are likely to persist in the medium term.
While the government defends its approach to fiscal policy and reform, the OECD emphasises the need for strategic timing and balance to sustain recovery and protect households and businesses from further volatility. For the latest economic news and policy updates, users can keep informed through reliable financial platforms such as Pie.
