OECD slashes forecast for UK growth but rejects rate cut calls

The OECD slashed its forecasts for UK economic growth and warned yesterday that low levels of skills and transport investment were harming productivity.

The rich nations' think-tank cut its estimate of growth this year to 1.7 per cent from its June figure of 2.4 per cent, making it the latest organisation to challenge Gordon Brown's official forecast of 3 to 3.5 per cent. But it said that with inflation above target and the economy close to capacity there was no "compelling case" for further rate cuts.

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It also reiterated its warning that the Government will have to raise taxes or cut spending if the forecast boom in corporate tax revenues failed to materialise. The warnings came in an otherwise positive assessment of the UK's economic performance, which it described as "impressive" and a "paragon of stability".

The UK has risen to first place for stability in the 30-nation OECD in the period 1998 to 2004, from 17th place in the years before that. Over the same period, the UK has risen from last to first place for inflation stability in the G7 group of seven industrialised nations.

The Treasury seized on the report, saying it was the most stable economy in the G7, having been one of the least stable in 1997 when Labour won power. "We are not complacent," a spokesman said. "We must continue to make progress on our skills and productivity, and invest in the future of our economy." The OECD report criticised the "mediocre innovation performance" and warned that decades of underinvestment had left an "unreliable" rail system that could be holding back productivity.

George Osborne, the shadow Chancellor, said: "The OECD assessment will make bad reading for the Chancellor. The OECD has highlighted problems with productivity, skill levels and basic literacy.... No wonder Britain is falling further behind in our ability to compete."

The OECD's comment on interest rates came a day after Mervyn King, the Governor of the Bank of England, used a speech to outline his worries over inflation that were seen as killing off hopes of a November rate cut.