The Organisation for Economic Co-operation and Development (OECD) has warned that Labour's anti-migration policies are contributing to the UK's sluggish economic growth. The forecast indicates a slowdown in productivity, partly due to a decrease in the number of workers entering the UK, which is softening economic momentum.
The OECD report highlights that Britain will experience the highest inflation among G7 economies this year and the second highest next year. Economic growth is projected to slow to 1.2% next year and is expected to rise only slightly to 1.3% by 2027. The unemployment rate is forecast to reach 5% by 2027, with inflation remaining above the 2% target next year before easing.
The OECD attributes the UK's economic struggles to past tax and spending adjustments impacting household income and consumption, as well as sluggish labor productivity and weak working-age population growth stemming partly from reduced inward migration. These factors are acting as a drag on the economy.
In response to rising support for Reform UK, the Labour government has implemented stricter migration policies. These include a significantly longer waiting period of 20 years for migrants relying on benefits to achieve settlement status, a measure quadrupling the current period and making it the longest in Europe. Migrants contributing to National Insurance will face a 10-year wait for settlement. Visa restrictions have also been imposed, including bans on countries that do not cooperate with the return of illegal migrants. Furthermore, plans are in place to curtail the human right to a family life to prevent individuals from bringing relatives or overstaying their visas.
These economic challenges come at a difficult time for Chancellor Rachel Reeves, who has faced accusations of misrepresenting data before the Budget to justify tax increases. The OECD's prediction of stagnant growth next year is linked to the continued impact of budgetary tightening on consumption and global uncertainty. A minor improvement in 2027 is anticipated to be supported by business investment and exports as financial conditions and global trade improve.
The OECD suggests that Reeves's fiscal policy room for maneuver will be constrained by high government borrowing costs. Following warnings from the Office for Budget Responsibility that Reeves's measures would not stimulate economic growth, the OECD recommended that tax and spending policies should further support growth potential, complementing structural reforms. The OECD's findings on unemployment align with business criticism that Reeves's hike in employer National Insurance contributions is contributing to a reduction in vacancies. The labor market is cooling, with a fall in payroll employees and a decline in vacancies. However, the OECD noted that recent increases in payroll taxes and the minimum wage have slowed the decrease in labor costs, with private sector pay growth remaining at 4.4%.
Additionally, the report mentions that Donald Trump's tariffs continue to negatively impact the UK, with weak survey measures of new manufacturing export orders reflecting a significant increase in aggregate effective tariff rates for domestic goods exporters to US markets. Services trade, however, has continued to grow steadily.
Chancellor Reeves defended her Budget measures, stating they addressed healthcare, child poverty, cut borrowing and debt, and lowered the cost of living. She claimed the OECD had upgraded growth forecasts and cut inflation forecasts for next year, attributing a 0.4 percentage point inflation reduction to her choices. She emphasized plans for growth through infrastructure investment, private investment attraction, and planning reforms, aiming to increase disposable income. Shadow Chancellor Sir Mel Stride criticized Labour's policies, arguing they punish work, businesses, and investment, leading to rising unemployment and inflation remaining above target.