UK needs tough action on government budget policy, OECD warns

LONDON (Reuters) -Britain's government needs to try harder to reduce borrowing and debt, the Paris-based Organisation for Economic Cooperation and Development said on Tuesday, just over a week before finance minister Rachel Reeves sets out long-term spending plans.

"Fiscal prudence is required as the monetary stance is easing gradually," the OECD said in a section on Britain in a broader assessment of international economies.

"Efforts to rebuild buffers should be stepped up in the face of strongly constrained budgetary policy and substantial downward risks to growth, while productivity-enhancing public investments should be preserved," it added.

Reeves has said she is committed to self-imposed fiscal rules which include balancing tax revenues and day-to-day spending by the 2029-30 financial year and lowering government financial liabilities as a share of the economy.

The OECD forecast that Britain's economy will grow 1.3% this year before slowing to growth of 1.0% in 2026 due to trade tensions and higher business uncertainty.

"The state of the public finances is a significant downside risk to the outlook if the fiscal rules are to be met," the OECD said. "Currently very thin fiscal buffers could be insufficient to provide adequate support without breaching the fiscal rules in the event of renewed adverse shocks."

At the last set of official forecasts in March, Reeves had 10 billion pounds of headroom to meet her fiscal rules - a narrow margin by historic standards that could easily be eroded by higher borrowing costs or weaker growth.

The OECD said Reeves should make targeted spending cuts, close tax loopholes and raise local property taxes as well as change the benefits system to get more claimants into work.

(Reporting by David Milliken; Editing by Chizu Nomiyama)