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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 her fiscal headroom.
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.
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Chancellor Rachel Reeves faces pressure after a higher-than-expected rise in state borrowing (PA)
It comes just hours after the defence secretary failed to rule out tax rises to pay for Britain’s “war readiness”, amid concerns that the government is not properly funding plans 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.
A new report by the economic organisation 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.
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The global economy is reeling from the impact of Trump’s tariffs (AP)
The report adds: “Strengthening the public finances remains a priority, by delivering on the government’s ambitious fiscal plans, 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 is key, while protecting the most vulnerable”.
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.
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Business secretary Jonathan Reynolds is set to meet his US counterpart to press for the implementation of a trade deal designed to limit the impact of Trump’s tariffs on the UK (PA)
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.