Britain must maintain its budget discipline, tackle high pension spending and address soaring energy prices to speed up its economy, the OECD said on Wednesday, underscoring the challenges for Andy Burnham who is set to become prime minister next week.
The Organisation for Economic Cooperation and Development said the UK economy had stabilised after a string of shocks including Brexit.
"But activity remains subdued and the evolving conflict in the Middle East is testing its resilience," the Paris-based organisation said in a report.
"High and volatile energy prices, rising fiscal pressures, weak productivity growth and large regional disparities continue to weigh on economic performance and living standards."
Former Manchester mayor Burnham, who is on course to replace Keir Starmer as prime minister, has vowed to stick to the government's fiscal rules. But some investors are concerned that he might increase public spending under pressure from within his centre-left Labour Party.
"Fiscal discipline remains essential, building on recent improvements to the fiscal framework," the OECD said. "High public debt, high interest payments and rising spending pressures, particularly in health and social care, limit fiscal space."
The OECD expects Britain's economy to grow by 0.9% this year and 1.1% in 2027. The forecasts were slightly weaker than those published last week by the International Monetary Fund for 1% growth this year and 1.3% next year.
Finance minister Rachel Reeves, responding to the OECD report, said Britain was on course for the fastest growth amongst Europe's big, rich economies, with AI and better ties with the European Union helping the economy.
The OECD said Britain should invest more in the electrification of its economy to reduce its reliance on gas imports which surged in price this year due to the Iran war.
"Risks remain tilted to the downside, particularly if a prolonged Middle East conflict further increases energy prices or global trade fragmentation intensifies," the OECD said.
The OECD said public spending increases should be targeted towards productivity-enhancing investment and tax efficiency reforms were needed to rebuild the government's fiscal room for manoeuvre and support long-term economic growth.
The government's so-called triple-lock for increasing state pensions should be reviewed and incentives for work and private pension savings should be strengthened.
Reducing regional productivity gaps was key to boosting growth, the OECD, a recommendation that will be welcomed by Burnham who has pledged to give local authorities greater powers.
Reducing regional disparities in politics could help "unlock the full productivity potential of all regions," the OECD said.
