The Organisation for Economic Co-operation and Development (OECD) has revised its 2024 growth forecast for the UK upward to 1.1%, more than doubling its previous estimate of 0.4% from May.
Despite this improved outlook, the UK remains under significant fiscal pressure. According to the OECD Economic Outlook, the UK’s debt interest payments as a share of government revenue have reached 7.7%, the highest level within the G7. This debt burden creates a complex backdrop for the Treasury as it prepares for the upcoming Budget on October 30.
Persistent Services Inflation and Monetary Policy
A major factor complicating the UK’s economic recovery is persistent inflation in the services sector. While headline inflation has moderated in many economies, the UK’s services inflation remains at 5.6%. This figure is higher than in the U.S. and most European countries.
The “stickiness” of service prices—which include costs in hospitality, transportation, and professional services—limits the flexibility of the Bank of England to implement further interest rate cuts. High interest rates, while intended to curb inflation, simultaneously contribute to the rising cost of servicing the national debt.
Global Risks and 2025 Outlook
The OECD projects that UK growth will reach 1.2% in 2025. However, this recovery remains vulnerable to external shocks. Geopolitical tensions in the Middle East and potential climate change-related energy disruptions are cited as primary risks that could dampen global and domestic growth.
For the UK government, the combination of upgraded growth and high debt costs presents a fiscal challenge. While the economy is expanding faster than previously anticipated, the high cost of borrowing consumes a larger portion of revenue, which may limit the fiscal headroom available for public spending or investment initiatives in the forthcoming fiscal plan.
