Prime Minister Andy Burnham (Image: Getty)
Andy Burnham has been dealt a major blow as UK economic growth is expected to slow next year. The Organisation for Economic Co-operation and Development (OECD) has forecast that the economy is set to grow by 1% next year, down from its previous prediction of 1.1%.
Opposition parties warned that more tax hikes are not the answer to Britain’s economic woes ahead of next month’s budget. Tory Shadow Chancellor Andrew Griffith said: “The OECD have downgraded the UK’s growth for 2027 to just a third of the average growth rate of the G20. We can and should aspire to do much better.
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“The OECD urge countries to control spending and improve public sector efficiency. Instead, this Government is trying to find new ways to tax you whilst having to pay interest rates on their borrowing which are the highest in the G7.”
Reform UK’s Robert Jenrick added: “The UK is forecast to grow much slower than the US with inflation still stuck at around 3%. And that’s before the possible shock to diesel supplies from a Trump export ban.
“Burnham doesn’t have the faintest clue how to get us back on track. His policy of more borrowing, spending and taxation failed before and will fail again.
“The only way to rescue our economy is to cut wasteful spending so we can cut taxes on work and lower energy prices for households.”
The economy is on course to have grown by 1.1% this year, according to the new forecasts by the OECD.
It is an update from a previous estimate of 0.9% growth, but is weaker than the 1.4% reported last year.
Mr Burnham admitted the state of Britain’s economy has worsened in recent months amid the Iran conflict, which has pushed up energy prices.
Speaking to reporters as he travelled to New York for the UN General Assembly, he said: “The truth of the matter is that because of the situation in the Middle East, the position changed, and has changed over the time I’ve been in. That’s just the reality of the situation that we’re in.
“And of course the message is that we want to see an end to the conflict as quickly as possible and we stand ready to play our part.”
Andy Burnham issued huge warning as PM suffers new economic blow
Prime Minister Andy Burnham has been handed a fresh economic warning after a major international forecast suggested that Britain’s growth could slow next year, adding further pressure on the government ahead of its first Budget.
The Organisation for Economic Co-operation and Development (OECD) expects the UK economy to grow by around 1 per cent in 2027, down from its previous forecast of 1.1 per cent. At the same time, inflation is expected to remain above the Bank of England’s 2 per cent target for longer than previously anticipated.
The figures represent a mixed picture for Burnham.
The OECD has upgraded its estimate for UK growth in 2026 to 1.1 per cent, compared with its earlier forecast of 0.9 per cent. But the weaker outlook for 2027 comes at an awkward moment for the Prime Minister, whose government has made economic growth, living standards and investment central parts of its programme.
The warning also arrives only weeks before Chancellor John Healey delivers the government’s Budget on October 28.
A stronger 2026 followed by a weaker 2027
The OECD’s latest assessment does not suggest that the UK economy is heading into an immediate recession.
Instead, it describes an economy that has performed somewhat better than expected during 2026 but faces significant headwinds going into the following year.
Growth is now expected to reach 1.1 per cent this year. However, the rate is projected to ease to 1 per cent in 2027.
The downgrade comes against a difficult international backdrop.
The continuing conflict in the Middle East has pushed energy prices higher, creating additional inflationary pressure for countries that rely heavily on imported oil and gas.
Britain is particularly exposed to those movements because increases in wholesale energy costs can quickly feed into transport, household bills and the wider cost of producing goods and services.
The OECD also expects UK inflation to average around 3.1 per cent in 2026. Although that is lower than its previous forecast of 3.6 per cent, it remains elevated and is expected to take longer to return to target.
That combination creates a difficult policy environment for the government.
Inflation is still causing problems
Official figures showed that UK consumer price inflation rose from 2.9 per cent in July to 3.1 per cent in August.
The increase was driven partly by higher motor fuel prices. Petrol prices rose sharply during the month, while diesel prices also increased.
The effect has been felt by households and businesses through higher transport costs and increased expenses across the economy.
Burnham has acknowledged that the international situation has changed significantly since he entered Downing Street.
The Prime Minister has previously said that the government would have to take “difficult decisions” in the October Budget because of the changing economic environment.
The Bank of England has also warned that persistent geopolitical disruption could create additional inflationary pressure.
Interest rates were held at 3.75 per cent in September, but Governor Andrew Bailey indicated that prolonged conflict and higher energy prices could eventually require tighter monetary policy.
That creates another problem for the government because higher interest rates can increase borrowing costs for households, businesses and the state.
The Budget is becoming increasingly important
Healey’s October Budget will be the first major fiscal test of the Burnham government.
The government has already committed itself to a number of expensive priorities, including higher defence spending, investment in housing, changes to social care and other public-service measures.
At the same time, Burnham has made clear that the government wants to improve living standards and support economic growth.
The challenge is finding enough money to finance those ambitions while complying with the government’s fiscal rules.
Recent borrowing figures have made that task harder.
In August, public-sector net borrowing reached £18.3 billion, substantially above the £15.5 billion forecast in a Reuters poll of economists. Between April and August, cumulative borrowing reached £77.3 billion, around £8.1 billion above the Office for Budget Responsibility’s expectations.
The deterioration has reduced the government’s room for manoeuvre.
According to Reuters, the government’s fiscal headroom has fallen from more than £24 billion in March to just over £10 billion.
That means the Chancellor has less flexibility if he wants to introduce new measures without either raising additional revenue, reducing spending or allowing borrowing to increase.
Tax rises remain a political flashpoint
Burnham has ruled out increases in the rates of several major taxes, including income tax, VAT, corporation tax and social security contributions.
That does not mean the government has ruled out every possible tax increase.
Attention has instead turned towards areas such as capital gains, property and wealth taxation.
The financial pressure has prompted opposition parties to attack the government’s approach.
Conservative and Reform politicians have argued that further tax increases could weaken growth rather than solve Britain’s underlying economic problems.
Those criticisms are political arguments rather than independent conclusions, but they underline the difficult environment facing the government before the Budget.
At the same time, the government argues that it must maintain fiscal discipline while investing in areas that can strengthen the economy over the longer term.
Borrowing costs add another layer of pressure
The UK’s public finances are being squeezed not only by the amount of borrowing but also by the cost of servicing existing debt.
Higher gilt yields increase the interest payments required by the government.
The problem becomes more serious when inflation expectations remain elevated because investors can demand higher returns to compensate for the increased risk of persistent inflation.
Recent market movements have therefore reduced the government’s financial room at precisely the moment when spending demands are increasing.
The House of Lords Library has also highlighted the difficult fiscal outlook, including rising borrowing costs and the possibility of reduced headroom against the government’s fiscal rules.
That is one reason why economic forecasts matter so much for the October Budget.
A relatively small change in growth, inflation or interest-rate expectations can alter the amount of money available to the Chancellor.
What the OECD warning actually means
The OECD forecast should not be interpreted as a prediction of economic collapse.
A 1 per cent growth rate still represents expansion rather than contraction.
The more significant issue is the pace of that growth and whether it will be strong enough to support improvements in living standards while also generating sufficient tax revenue.
The OECD’s assessment also recognises that some government measures could support household consumption.
One example is the planned removal of VAT from household energy bills from October.
However, the organisation warned that renewed energy-price pressures could offset some of those benefits by keeping inflation higher.
That leaves policymakers facing a familiar dilemma.
Supporting households can protect spending and living standards, but expensive interventions can place additional pressure on public finances.
Cutting spending can improve the fiscal position, but may reduce demand or put pressure on public services.
And increasing taxes can raise revenue, while potentially affecting household spending and business investment depending on how the measures are designed.
Burnham’s growth ambitions face a test
Economic growth has been one of the defining themes of Burnham’s government.
The Prime Minister has repeatedly argued that Britain needs stronger investment and a more productive economy.
The latest OECD forecast does not say those objectives are impossible.
But it does demonstrate the scale of the challenge.
Britain is operating in an environment where energy prices remain vulnerable to geopolitical developments, inflation is above target and government borrowing costs are elevated.
The government therefore cannot assume that stronger growth will automatically solve the fiscal pressures facing it.
The Resolution Foundation has separately pointed to a potentially more positive development in Britain’s productivity data. A new methodology from the Office for National Statistics suggested that historical productivity growth between 2007 and 2019 may have been considerably stronger than previously estimated.
That revision could eventually affect the way official forecasters assess Britain’s economic capacity.
However, the potential improvement is unlikely to provide an immediate solution for the October Budget.
The warning comes at a difficult time
Burnham’s government is still relatively new, having entered office in July.
That means the Prime Minister is attempting to establish his economic agenda while dealing with problems that developed before his government took office as well as new pressures created by the international situation.
The continuing Middle East conflict has complicated that task.
Higher oil and gas prices have contributed to inflation, while uncertainty has affected financial markets and government borrowing costs.
Burnham has said that the government wants the conflict to end as quickly as possible and that Britain stands ready to play its part diplomatically.
But the economic consequences cannot be isolated from events overseas.
For British households, the effects appear through petrol prices, energy bills, food costs, mortgage rates and other everyday expenses.
What happens next?
The immediate focus will now move towards Healey’s Budget.
The Chancellor will need to explain how the government intends to balance its spending commitments with the fiscal rules while responding to a weaker growth outlook.
He will also have to decide how much weight to place on measures designed to support households and how much emphasis should be placed on reducing borrowing.
The OECD’s forecast provides neither an automatic diagnosis nor a single policy solution.
It does, however, underline the constraints facing the government.
Britain is expected to grow more slowly next year than in 2026, while inflation is likely to remain above target for longer.
At the same time, borrowing has been running above official expectations and the government’s fiscal headroom has narrowed.
That combination means Burnham and Healey enter the final weeks before the Budget with less room for error.
The government can point to the improved 2026 growth forecast as evidence that the economy has shown some resilience.
But the weaker 2027 outlook means the pressure to demonstrate how its policies will generate sustainable growth is unlikely to disappear.
For Burnham, the central economic question is therefore becoming increasingly clear: how can the government finance its priorities, protect households from continued cost pressures and encourage stronger growth without putting additional strain on already stretched public finances?
The answer will begin to emerge when Healey stands at the despatch box on October 28.
Until then, the latest OECD figures provide a fresh warning that Britain’s economic recovery remains fragile, and that the decisions taken by the Burnham government in its first Budget will be made against a far more difficult backdrop than ministers might have hoped when they entered Downing Street.