The Organisation for Economic Cooperation and Development (OECD) has advised the incoming UK government to slash spending and tackle the nation's youth jobs crisis instead of raising taxes to improve public finances. The Paris-based body's latest survey of the UK emphasizes that 'fiscal discipline remains essential,' recommending 'expenditure-led consolidation' due to taxes already being at historically high levels.
The OECD's prescription is likely to face opposition from left-wing Labour members advocating for increased spending. The report indicates that maintaining current spending plans will be 'necessary but insufficient,' necessitating cuts. Given the tax burdens already impacting families and businesses under the current Labour administration, the OECD urges the government to avoid imposing further tax increases. The report suggests that 'tax reforms should prioritize strengthening efficiency and revenues rather than raising headline rates,' reiterating that 'the tax burden is already high.'
Further action is recommended to address the youth employment deficit and the rise in long-term sickness. The OECD notes that youth employment has remained subdued since the pandemic, and long-term sickness, particularly due to mental health issues, is high. Reforms aimed at boosting employment have reportedly stalled and are deemed 'critical' for increasing employment levels, which are necessary to support the rising costs of pensions.
The OECD assesses the UK economy as having stabilized but remaining 'subdued,' with growth forecasts for the year unchanged at 0.9 percent and unemployment projected to reach 5.5 percent. The report, issued shortly before Andy Burnham is set to become Prime Minister, stresses the importance of a prudent approach to public finances. It highlights that the new leader's fiscal room for maneuver will be limited by high public debt, significant interest payments, and increased spending on health and social care.
Market sentiment is reportedly sensitive to the prospect of a leftward policy shift under Burnham, particularly if Ed Miliband is appointed Chancellor. Bank of England Governor Andrew Bailey has issued a warning about the necessity of adhering to fiscal rules to avoid alarming markets. Investment firm Rathbones has reduced its holdings in UK government bonds, known as gilts, due to concerns that the new leadership might replicate the market turmoil experienced in 2022 following the former Prime Minister Liz Truss's mini-Budget.