OECD Economic Surveys: United Kingdom 2026

Executive summary

Key messages

The UK economy has stabilised, but activity remains subdued and the evolving conflict in the Middle East is testing its resilience. High and volatile energy prices, rising fiscal pressures, weak productivity growth and large regional disparities continue to weigh on economic performance and living standards. The government’s pro-growth agenda is broadly appropriate and aligned with past OECD recommendations. Success will hinge on sustaining the structural reform momentum while maintaining sound macroeconomic and fiscal policies.

• Fiscal discipline remains essential, building on recent improvements to the fiscal framework. High public debt, high interest payments and rising spending pressures, particularly in health and social care, limit fiscal space. Continuing to strengthen the fiscal framework, reallocating spending towards productivity-enhancing investment and improving tax efficiency would help to rebuild fiscal buffers and support long-term growth.

• Rising long-term spending pressures also call for pension reforms. Preserving pension adequacy while containing fiscal risks will require reviewing state pension indexation over time, strengthening work incentives, and improving private pension savings for groups with coverage gaps.

• Strengthening energy security is essential for growth, competitiveness and resilience to external shocks. While progress in decarbonising electricity generation is reducing reliance on fossil fuels, energy costs remain high and continue to weigh on households and firms. Better-aligned price signals, alongside faster investment in electricity networks and system flexibility, are needed to support rapid electrification and reduce exposure to gas price volatility.

• Reducing regional productivity gaps is key to raising growth and living standards. Progress requires a coherent long-term strategy that aligns skills, infrastructure, innovation and finance, supported by strong local governance capacities to unlock the full productivity potential of all regions.

The economy has improved but faces external headwinds and enduring structural constraints

The United Kingdom faces a challenging economic environment, as past supply shocks and adverse external conditions, including high energy prices, trade tensions and the exit from the EU single market, continue to weigh on activity and public finances. The government’s ambitious and comprehensive pro-growth reform agenda, focused on investment, planning and labour supply, provides a strong basis for a gradual recovery. Sustaining stronger growth and higher living standards will require continued structural reforms alongside macroeconomic discipline.

Long-standing structural weaknesses continue to weigh on the UK economy (Figure 1). Weak productivity growth since the mid‑2010s has eroded potential output, reflecting subdued business investment, lower EU trade intensity, skill mismatches and persistent regional disparities. Fewer people are participating in the labour market, partly due to rising health‑related inactivity and lower inward migration. Continued reliance on gas leaves the economy exposed to global energy shocks, weighing on competitiveness and affordability. Structural reforms are critical to boost growth and living standards amidst persistent fiscal pressures. The government’s Growth Mission aims to strengthen economic potential through public investment, planning reform, industrial policy and labour market measures. Achieving stronger and more durable growth will require sustained implementation of structural reforms to raise productivity and improve economic resilience. Priorities include increasing labour supply, accelerating infrastructure and electricity network investment, reducing barriers to trade and enhancing local governance to support growth across regions.

Figure 1. Per capita growth has gradually strengthened but remains subdued

Real GDP per capita, 2016 = 100

Note: OECD and G7 refer to weighted averages.

Source: OECD Economic Outlook: Statistics and Projections (database).

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The growth outlook remains modest amidst global uncertainty and renewed energy inflation

GDP growth will slow temporarily in the near term as renewed inflationary pressures due to the evolving conflict in the Middle East and uncertainty weigh on demand. Tight financial conditions and weak external demand are expected to restrain investment and exports. Growth is expected to strengthen gradually from 2027 as inflation pressures ease.

Growth strengthened following the 2021-2023 energy crisis. Stronger domestic demand led the recovery, supported by disinflation and rising real wages. It more than offset subdued external demand, which reflects especially weak goods exports. Service activity expanded as household consumption recovered.

Renewed energy inflation due to the evolving conflict in the Middle East has weakened near-term growth prospects (Table 1). This comes on top of continued global trade uncertainty and still tight financial conditions, which are weighing on investment and exports. Growth is expected to strengthen gradually from 2027 as price pressures ease, real incomes recover further and financial conditions become less restrictive. Risks remain tilted to the downside, particularly if a prolonged Middle East conflict further increases energy prices or global trade fragmentation intensifies. The monetary and fiscal policy mix is appropriately restrictive given lingering inflationary pressures and high public debt. The Bank of England has begun to gradually withdraw monetary restriction while remaining attentive to inflation risks. In parallel, the government has started to remove budgetary support and rebuild fiscal buffers. Careful calibration of macroeconomic policies remains essential given significant downside risks to economic activity and upside risks to inflation. The government’s fiscal response to the energy shock is appropriately targeted and preserves price signals, thus minimising the negative impact on the fiscal position.

Table 1. Growth will slow temporarily

Annual growth rates (%), unless specified

	2023	2024	2025	2026	2027
Real GDP	0.3	1.0	1.4	0.9	1.1
Private consumption	-0.4	-0.2	1.0	0.4	0.5
Government consumption	2.1	2.9	1.6	1.7	2.8
Investment	0.5	1.7	4.3	0.0	1.5
Net trade contribution (% points)	-0.2	-0.5	-0.7	-0.3	-0.1
Current account balance (% of GDP)	-3.6	-3.0	-2.4	-3.5	-3.8
Consumer price index	7.3	2.5	3.4	3.7	2.4
Unemployment rate (%)	4.0	4.3	4.8	5.5	5.3
Fiscal balance (% of GDP)	-6.0	-6.1	-5.5	-5.1	-4.4
Public debt (% of GDP)	98.8	99.9	102.3	103.9	105.4

Source: OECD Economic Outlook: Statistics and Projections (database).

The financial sector appears broadly resilient, but growing reliance on non‑bank finance has increased exposure to liquidity risks. Banks maintain strong capital and liquidity positions, and aggregate household and corporate indebtedness remains relatively low. However, increased interconnectedness with non-bank financial intermediaries and the growing importance of liquidity backstops heighten vulnerability to liquidity shocks. The gilt market is also exposed, as non-banks are major holders of government debt. Strengthening oversight of non-bank financial intermediaries would further support financial stability.

Tax and spending reforms are needed to rebuild fiscal space and support growth

Modest growth, high public debt, high interest payments and increasing spending pressures from ageing, climate and defence are limiting fiscal space. Recent changes to the fiscal framework provide greater flexibility for productivity-enhancing investment, but further improvements are needed to strengthen the predictability of fiscal decisions, alongside targeted spending restraint and reforms to improve tax efficiency. At the same time, raising long-term growth will depend on effective implementation of the government’s supply-side reforms.

Current fiscal plans aim to support growth while rebuilding fiscal space, but leave limited room for manoeuvre. Public investment is set to rise over 2025-27, largely financed through borrowing, while compliance with fiscal targets depends on higher revenues and spending restraint towards the end of the decade. Although the revised fiscal framework is an improvement, fiscal policy messaging remains overly focused on short-term headroom against fiscal rules, encouraging short-term fiscal decisions and weakening predictability. Relying on a broader assessment of fiscal sustainability would support more stable decision-making and improve the effectiveness of the framework.

Long-term fiscal sustainability will require reforms to contain rising spending pressures in pensions, healthcare and disability. With taxes already at historically high levels, expenditure-led consolidation will be essential. Adhering to planned departmental spending paths will be necessary but insufficient. Rising healthcare, disability and special education costs reflect demographic pressures and structural inefficiencies. Improving public sector productivity through targeted reforms and spending reductions will be key to preserve service quality within tighter budgets.

Tax reforms should prioritise strengthening efficiency and revenues rather than raising headline rates. The tax burden is already high, while the system remains complex and distortionary. Many tax expenditures narrow the tax base and are not systematically evaluated, while persistent compliance gaps point to weaknesses in enforcement. Strengthening tax administration, reducing inefficient tax expenditures and differences across legal forms would improve revenues while supporting growth.

Pension reforms are needed to ensure the sustainability and adequacy of the system

The pension system delivers adequate outcomes on average, supported by the complementarity between the state and private pensions. However, rising fiscal pressures from state pensions and insufficient private pension savings among some groups create growing challenges. Addressing them will require reforming state pension indexation, strengthening work incentives to broaden the financing base, and supporting private pension savings, particularly among the self-employed.

Under the triple lock, state pensions have risen significantly faster than earnings, adding fiscal pressures and uncertainty, particularly during periods of macroeconomic volatility or weak growth (Figure 2). Reforming the triple lock is necessary to reduce fiscal risks, but requires careful preparation and consideration of public acceptability.

Weakness in labour market participation risks eroding the financing base of state pensions. Youth employment has remained subdued since the pandemic and long-term sickness due to mental ill-health is high. The reform of work incentives within the health-related welfare system has stalled, with a review underway to address the gatekeeping of disability benefits. Advancing these reforms is critical to support higher employment and ensure a broad contribution base for the pension system.

Private pension participation has increased significantly through automatic enrolment, but coverage among some groups remains low. Participation is weak among the self-employed, partly reflecting heterogeneity in income, including for those with low and volatile earnings. Extending automatic enrolment to the self‑employed, while preserving the right to opt‑out, could help broaden private pension coverage and improve retirement incomes.

Figure 2. The triple lock creates significant fiscal risks

OBR projections of state pension expenditure, % of GDP

Source: OBR (2025[1]) Fiscal Risk and Sustainability: July 2025.

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Decarbonising power generation is central to energy security and competitiveness

Greenhouse gas emissions halved since 1990, and renewables now generate more than half of electricity supply. However, recent energy price spikes have highlighted the economy’s continued exposure to volatile fossil fuel prices. Decarbonisation reduces reliance on imported fossil fuels, but also changes the nature of energy security risks. As electricity becomes the central energy source, ensuring affordable, reliable and resilient supply will require reforms that address price stability, expand grid capacity, and improve system flexibility and climate resilience.

Electricity prices remain high and closely linked to international gas markets (Figure 3), weakening incentives to electrify and prolonging exposure to fossil fuel price volatility. Gas-fired plants frequently set marginal wholesale prices, while policy and network charges fall more heavily on electricity. Narrowing the electricity–gas price gap by reducing electricity levies, phasing out fossil fuel support and expanding carbon pricing would improve price signals while preserving incentives to reduce emissions. Any support measures introduced in response to future energy price shocks should remain temporary and targeted to vulnerable households.

Removing grid bottlenecks is essential to support rapid electrification and unlock clean energy investment. Rapid growth in renewable generation and electricity demand has turned the grid into a binding constraint and a central energy security risk. Although enough projects have been in the pipeline to meet the government’s ambition of a largely clean power system by 2030, the previous first-come first-served connection process did not prioritise projects that were already built or strategically important. Recent reforms prioritising ready-to-proceed projects should help accelerate clean energy investment where it is most needed. Swift implementation and clear communication with investors will be important, along with monitoring and potentially linking connection priority with developers’ delivery progress on milestones.

Strengthening the climate resilience of the electricity grid is essential for energy security as extreme weather events become more frequent. Although transmission and distribution operators have developed adaptation plans, implementation remains uneven and oversight limited. Regular cross-sectoral stress testing, stronger reporting and better data sharing will be essential for monitoring progress and improving emergency response.

Figure 3. Electricity prices remain high

Source: IEA Energy Prices (database).

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Reducing regional productivity gaps would raise aggregate growth

Regional productivity gaps continue to weigh on overall economic performance. Although interregional gaps are broadly in line with OECD averages, recent convergence has largely reflected stagnation in high-performing areas rather than sustained catch-up in lagging regions (Figure 4). Sustained productivity convergence will require consistent implementation of recent government strategies and ongoing devolution efforts across England. A coherent long-term approach that aligns skills, infrastructure, innovation, finance and governance is essential to unlock productivity growth across regions.

Figure 4. Regional productivity disparities persist

GVA per worker, in thousand GBP

Note: No data is available for Northern Ireland for 2022 and 2023 and therefore for the UK average.

Source: OECD Regional, Cities and Local Areas (database).

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Strengthening local skills systems is essential for supporting productivity growth in all regions. Despite strong average educational attainment, the share of young people not in employment, education or training (NEET) remains above the OECD average in all English regions. Recent reforms to improve school-to-work transitions, including changes to the apprenticeship levy and the Youth Guarantee, are steps forward, but regions with high NEET rates often face delivery capacity constraints. Targeted support to strengthen local implementation would help translate national programmes into durable employment outcomes.

Better physical and digital connectivity is crucial to unlock regional economic potential. Public transport investment has long been concentrated in London, limiting productivity gains elsewhere and reinforcing existing divides. Planned reforms to accelerate major infrastructure approvals could support investment, but their effectiveness depends on aligning new projects with regional development strategies, housing supply and local transport integration.

Accelerating the diffusion of innovation among firms would boost productivity across regions. Despite strong national research strengths and high-performing frontier firms, digital adoption by SMEs remains uneven. More structured and locally tailored support can help firms progress through stages of digital maturity and allow them to better connect with skills provision, innovation facilities and finance.

Stronger co-ordination across all levels of government is essential for delivering regional productivity gains. Responsibilities shaping regional outcomes remain dispersed across departments, agencies and non-departmental bodies, weakening policy coherence and complicating delivery for local authorities. Evaluation practices have been inconsistent, limiting the ability to learn from past programmes. Embedding a coherent monitoring and evaluation framework within the government’s mission-based approach would strengthen accountability, shared learning and strategic alignment.

Building stronger local institutional capacity must accompany the devolution of power. Capacity varies widely across local authorities, with many areas lacking the analytical capability, staffing and institutional stability needed for long‑term planning. Prioritising training, staffing support and long‑term capacity building would help all places make effective use of devolved responsibilities and contribute to more balanced productivity growth.

 

MAIN FINDINGS	KEY RECOMMENDATIONS
Strengthening growth while ensuring fiscal sustainability
Weak goods exports and persistent trade frictions are weighing on growth.	Reduce non-tariff barriers to EU-UK trade, improve global market access for services and expand market opportunities under the UK Trade Strategy.
Underlying inflation remains elevated, driven by persistent wage growth and services inflation.	Maintain a restrictive, data-dependent monetary policy stance until underlying price pressures fall sustainably to target-consistent levels to ensure that inflation expectations remain well-anchored.
Banks’ capital and liquidity positions appear sound, but interconnectedness with the large non-bank sector increases exposure to liquidity shocks.	Stress-test the entire private market ecosystem systematically within the broader UK financial system, as part of the Bank of England’s System-Wide Exploratory Scenario.
The fiscal stance is moderately restrictive while inflation remains above target.	Maintain a restrictive fiscal stance to support disinflation and rebuild fiscal buffers.
The fiscal rules introduced in 2024 allow for investment, limit borrowing-financed consumption and align with spending reviews. However, fiscal policy decisions remain highly sensitive to short-term changes in the headroom against fiscal rules, which can weaken predictability and encourage frequent adjustments.	Strengthen the effective use of the fiscal framework by focussing less on short-term headroom, relying more on broader indicators of medium-term fiscal sustainability and showcasing uncertainty around point estimates.
The government’s plans to raise public sector efficiency rely on quasi-uniform cuts across departments despite bespoke efficiency targets, casting doubt about deliverability and public service preservation.	Allocate spending cuts based on actual scope for efficiency gains, accounting for changes in departmental responsibilities and past savings in administrative spending.
Numerous tax expenditures, including reduced VAT rates and homeownership relief, narrow the tax base, cost about 7% of GDP, and are not systematically evaluated.	Systematically review tax expenditures and gradually phase out those inefficient or poorly targeted.
Small companies account for a rising share of uncollected tax liabilities, partly reflecting tax system complexity, despite increased enforcement efforts.	Reduce tax differences across legal forms to reduce small companies’ incentives for tax-motivated incorporation, which have more complex tax liabilities.
Preserving affordability in the pension system
The triple-lock indexation mechanism for state pensions is unusually generous, exerts upward pressure on public spending, and adds significant fiscal risk.	Prepare a medium-term reform of the triple lock that preserves pension adequacy while improving fiscal sustainability and reducing expenditure volatility.
Subdued employment among younger cohorts and persistent health-related inactivity risk weakening the financing base of state pensions.	Continue advancing pro-work reforms, including gatekeeping disability benefits, supporting school-to-work transitions and enhancing lifelong learning support.
The participation of the self-employed in private pensions is low and many have inadequate pension savings.	Consider extending automatic enrolment in the private pension system to the self-employed, while preserving the right to opt out.
Strengthening energy security
Electricity prices remain closely linked to gas prices because gas-fired generation frequently sets the marginal wholesale price. Final prices do not reflect relative carbon content, as electricity bears a higher share of policy costs and carbon pricing than gas.	Gradually narrow the electricity–gas price differential by explicitly pricing emissions from fossil fuels, while continuing to reduce levies on electricity.
Grid infrastructure has become a binding constraint on the clean power transition, with long planning timelines and severe connection backlogs.	Swiftly implement grid connection reform and link connection permissions to progress in delivery milestones.
Electricity infrastructure is increasingly exposed to flooding, heat and storm risks, while adaptation planning and implementation remain uneven.	Embed climate resilience standards into grid planning and require regular system-wide stress tests to assess critical infrastructure resilience.
Reducing regional productivity disparities
The share of young people not in employment, education or training is above the OECD average in all English regions. While reforms to strengthen school‑to‑work transitions are important, regions with high NEET rates face capacity and employer‑engagement constraints.	Provide targeted additional support to regions with high NEET rates to strengthen local implementation capacity, expand access to high‑quality training and employment opportunities, and deepen engagement with local employers and delivery partners.
Transport infrastructure investment has been disproportionately concentrated in London, reinforcing its agglomeration advantages while limiting connectivity gains elsewhere.	Ensure capital spending targets long-standing transport connectivity gaps in lagging areas and aligns with regional economic strategies, housing supply and local transport integration.
Uneven adoption of digital technologies among SMEs, particularly outside London and the South East, slows productivity diffusion within and across regions.	Develop an integrated programme to guide SMEs through progressive levels of digital maturity, combining tailored advisory services, targeted financial incentives, and sector-specific resources.
Weak and fragmented evaluation of regional policies limits accountability, learning and effective reallocation of resources.	Create a cross-government framework to monitor and evaluate policy outcomes and encourage shared learning across departments and levels of government.
Devolution plans envision a more consistent structure for regional and local governments, but institutional capacity varies widely.	Prioritise training and staffing support to enable better policy planning, evaluation, and local delivery, particularly in lagging areas.