The UK is set for a temporary economic uplift next year due to increased government spending, according to the Organisation for Economic Co-operation and Development (OECD), although it cautioned about rising inflation and the potential “crowding out” effect on private investment.

The OECD forecasts a growth rate of 1.7% for the British economy in 2024, marking an increase from a prior estimate of 1.2% and an improvement over the downgraded expectation of 0.9% for this year, which was originally 1.1%. The growth outlook for 2024 was adjusted following a modest 0.1% expansion in the third quarter.

While the United States is projected to be the top-performing G7 economy next year with an anticipated growth of 2.4%, the UK is also expected to outpace the eurozone (1.3%), Japan (1.5%), and France (0.9%). However, its growth will fall short of Canada’s estimated 2% growth and Germany’s (0.7%) and Italy’s (0.9%).

The UK government aims to achieve the fastest sustained growth rate in the G7 over the next five years, a challenging target given the OECD’s expectation of a slowdown to 1.3% in 2026 as government spending is set to decline.

The OECD noted that growth will be temporarily supported by significant public expenditure increases outlined in the autumn budget, stating, “Fiscal policy will tighten from 2024 to 2026, though not as much as previously thought, due to substantial fiscal loosening from the autumn budget announcement.”

A temporary economic boost is forecast for 2025 through front-loaded fiscal reforms, but the economy is expected to slow as rising taxes begin to impact private consumption while additional government borrowing pressures may inhibit business investment.

In her first budget, Rachel Reeves introduced £40 billion in tax hikes and committed to significant public services investment over the next two years, which will significantly decrease by 2029. Economists have warned that the government may need to increase spending post-2026 through further tax hikes.

The OECD commended the government’s intentions to invest in “productivity-enhancing public investment,” which is anticipated to enhance long-term growth potential.

The Chancellor stated, “Growth is our top priority, and the OECD’s uplifting forecast positions the UK as the fastest-growing European economy in the G7 over the next three years, and that’s just the beginning.”

He further emphasized that growth is meaningful only if it translates into increased incomes for households, affirming the commitment to shielding citizens from tax increases in the budget and ensuring that growth translates into improved living standards.

According to the OECD, the surge in government spending is expected to keep inflation above the Bank of England’s target at 2.7% next year, up from the previously estimated 2.4% in September.

The OECD also indicated that stubborn inflation rates would likely lead the Bank of England to reduce interest rates to 3.5% by early 2026, surpassing market predictions of 3% to 3.25%.

The OECD’s analysis reveals that half of the items in the UK’s consumer inflation basket are still witnessing annual price increases of 3%, and that service sector inflation, primarily driven by wages, must decrease by 3 percentage points from its current state to stabilize inflation over the medium term.

Global economic growth forecasts were also adjusted upward by 0.1 percentage points for this and next year, expected to reach 3.2% and 3.3% respectively.