Public Debt and Trade Tensions Weaken UK Economic Growth, OECD Says

The Organisation for Economic Co-operation and Development (OECD) recently released a report indicating some economic problems facing the United Kingdom. The report outlines that the rising levels of public debt and ongoing trade tension are important contributors to the economic growth prospects for the country. This analysis will attempt to take an objective approach to the findings of the report, help situate the report and its conclusions within historical and global developments, provide an assessment of the evidence and how it is treated in this report, and assess the implications for the UK economy and society.

Context

The OECD’s economic outlook is released twice a year and is a reporting on the fiscal health, trade circumstances, and economic outlook for member countries, and in this case for the UK. In its latest global forecast, the OECD reduced the UK’s forecast GDP growth rate for 2025 to 0.7% from 1.1%, citing a deteriorating outlook for growth and debt in the UK. Now that the UK’s debt (government and private) is greater than 100% of GDP, and we see continuing strains on trade, particularly with the EU (the largest trading partner), the prospect for trade and growth looks bleak.

The UK’s economic stagnation is not occurring in a vacuum. Everywhere economies have been struggling with post-pandemic recovery, the energy market shock following the invasion of Ukraine by Putin, and inflation. The UK, however, has certain structural challenges. The impact of the external shocks is compounded here by Brexit-related trade barriers, sluggish productivity, and political instability.

Public Debt Concerns

As the OECD has indicated, public debt in the UK is among the highest of the G7 countries. Earlier this year, the Office for Budget Responsibility (OBR) published its report which indicated that UK public sector net debt (excluding public sector banks) was £2.7 trillion, or approximately 101% of GDP. This debt level reflects spending for the pandemic, increased energy subsidies, as well as greater welfare costs owing to inflation.

The OECD cautions that elevated debt servicing costs, compounded by rising interest rates, are taking resources away from public investment. The Bank of England’s base rate, on hold at 5.25%, makes borrowing costlier and places greater pressure on the Treasury. Government borrowing can be used to kickstart growth during periods of economic slowdown, but the OECD has made it clear that the UK has limited fiscal space, is forced to prioritise spending needs, and must incorporate long-term sustainability.

Trade Tensions

The study also underlined that persistent trade frictions, chiefly the reduced trade flow with the EU, represented an additional drag on growth. Since Brexit, customs have been introduced, there has been regulatory divergence across the BoE and the EU, and there has been a reduction in labor mobility, introducing barriers that had previously not existed. Exports from the UK to the EU have still not returned to pre-Brexit levels. The UK’s Office for National Statistics (ONS) data indicates a 12% drop in goods exports to the EU from 2019.

The OECD also noted renewed tensions with China and the US over technology and investment rules could also contribute to slower export growth. While Britain has sought to diversify trade with new deals with countries including Australia, Japan, and CPTPP partners, these deals do not yet lessen the volume lost from EU trade.

The OECD’s report is predicated on accepted economic data, but it can still be useful to question the assumptions. Some argue that the level of debt in the UK is not unprecedented, and investment in infrastructure, education, or green technologies will generate long-term economic returns. Others express concern that OECD forecasts are generally slightly internally conservative, and with the emphasis on longer-term debt, they won’t take into account future policy changes or private sector flexibility and agility.

Furthermore, some commentators point out that while trade with the EU has fallen off, UK services exports, especially in finance and technology exports, have held up well. The City of London is still a global financial centre despite having ceded some market share to European cities.

Implication

The economic trends revealed on the OECD report have far-reaching consequences. For the average household in the UK, stagnant growth rates and high inflation, equate to stagnant wages and rising costs of living. Already strained public services could face additional swimming, if the government chooses fiscal retrenchment. Businesses, especially small and medium businesses dependant on EU trade, faced bureaucracy.

More generally, continued poor economic performance may gradually cause a loss of investor confidence and weaken the UK’s position in geopolitics. Furthermore, high levels of debt limit what the government can do to resolve the next crisis, which could be around climate change or the next global financial shock.

The OECD has released its new economic outlook, and it’s not great news for economic policy in the UK. Although rising public debt and ongoing trade tensions have sapped growth prospects and cut the government’s capacity for investment in more sustainable development, the analysis is comprehensive and in line with good data; yet, there is room for debate about policy responses to these challenges. The UK will likely have to attempt to be fiscally prudent yet invest to some extent in the future, though it will possibly have to return to active trade diplomacy. Although continuing forward for the government will not be simple, it will take some decisiveness from its leadership.

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