Rachel Reeves has received warnings regarding the potential breach of her fiscal rules if the UK economy experiences a growth shock.

The Organisation for Economic Co-operation and Development (OECD) has become the second major analyst in a fortnight to caution the chancellor that her “thin” fiscal buffers may lead her to miss her deficit reduction target, following similar advice from the International Monetary Fund last week.

In its annual review of developed economies, the OECD downgraded the UK’s growth forecast for this year and next due to escalating trade uncertainties, high interest rates, and declining confidence among households and businesses.

The organization projects a 1.3 percent growth for the UK this year, lowered from a previous estimate of 1.4 percent, with growth anticipated to decelerate to 1 percent next year, down from an earlier forecast of 1.2 percent.

This reduced growth outlook indicates that the UK public finances carry significant risks in meeting fiscal targets, the OECD stated.

“Currently very thin fiscal buffers could prove inadequate to support the economy without breaching the fiscal rules if adverse shocks occur,” it warned.

Reeves has allowed herself nearly £10 billion in leeway to comply with her fiscal regulations, marking one of the narrowest margins on record. The chancellor’s primary fiscal objective is to align day-to-day spending with tax revenues by the end of the parliamentary term.

The OECD’s assessment comes just ahead of next week’s spending review, as Reeves faces the challenge of managing departmental budgets over the upcoming three years following a recent reversal on limiting winter fuel payments to seniors.

The OECD recommended the chancellor bolster public finances through a “balanced” spending review and autumn budget that integrates targeted spending cuts, including closing tax loopholes; implementing revenue-generating measures such as reassessing council tax bands based on updated property values; and eliminating discrepancies in the tax system.

Projections suggest the UK’s budget deficit is poised to decrease from 6 percent in 2024 to 4.5 percent next year, bolstered by increased tax revenues. However, rising market borrowing costs and interest rates are expected to increase the national debt to 104 percent of GDP by 2026.

Furthermore, the OECD indicated that additional supply-side reforms, such as an overhaul of the National Planning Policy Framework, could enhance potential output and alleviate fiscal pressures over the long term.

The Bank of England is anticipated to gradually relax monetary policy, with three interest rate reductions expected within the next year.

In its first projections following President Trump’s tariff policies, the OECD predicts global growth to rise by 2.9 percent this year, down from the earlier forecast of 3.3 percent in March. The US economy, in particular, has been downgraded significantly, with growth predicted to slow to 1.6 percent this year after 2.8 percent growth in 2024. Average consumer price inflation is also expected to climb to 3.2 percent from 2.5 percent last year.

“Weakened economic prospects will be globally felt, with hardly any exceptions,” remarked Alvaro Pereira, chief economist of the OECD. “Reduced growth and diminished trade will negatively impact incomes and slow down job creation.”

Conversely, other analysts have revised their growth forecasts upwards following stronger-than-expected economic performance in the first quarter.

KPMG has projected a 1.2 percent expansion in the economy for this year, following a 1.1 percent growth rate in 2024. The firm noted that British businesses stand in a “unique” position to take advantage of the government’s partial trade agreement with the US, which lowers tariffs on cars and most goods to 10 percent and eliminates levies on steel.

Similarly, the British Chambers of Commerce has raised its annual growth forecast from 0.9 percent to 1.1 percent.