The OECD’s new Foundations for Growth and Competitiveness 2026 report delivers a blunt message to Chancellor Rachel Reeves. Britain’s tax system is riddled with complexity, loopholes, and distortions that are costing the economy dearly, and holding back productivity and growth.
The 325-page study, published on Thursday (9 April), puts the UK under the microscope alongside 47 other countries.
Its verdict on Britain is sobering. GDP per capita growth has been sluggish for years, dragged down by weak productivity, modest capital deepening, and business investment that still sits below pre-Brexit levels.
Total factor productivity (TFP) is subdued, labour utilisation has flatlined amid rising inactivity, and the tax system is one of the biggest structural drags.
A tax system that’s complex and regressive
The report singles out the UK tax code for special criticism.
Parts of it are so convoluted that compliance costs have soared, especially for smaller businesses that lack the resources to navigate the maze. Tax compliance has fallen as a result.
VAT reliefs are “largely inefficient and regressive,” while property taxes rely on outdated valuations.
Kinks in the income-tax schedule weaken work incentives, and the deductibility of net interest payments lets unprofitable investments look viable on paper.
The OECD recommends that Reeves launch an in-depth tax review to make the system “more efficient and growth-friendly” by slashing distortions, closing loopholes, and scrapping reliefs and exemptions that serve no clear economic or social purpose.
She should also broaden the VAT base by phasing out exemptions and compensating low-income households with targeted transfers. Finally, the group recommends the carrying out of regular tax-expenditure reviews to keep the system clean.
Five structural priorities for the UK
Tax is only one of the OECD’s top concerns. Using its new policy-prioritisation model, the report identifies the UK’s five biggest reform needs:
- Human capital: Too many young people leave school without basic skills. Employers are using subsidised apprenticeships to train existing staff rather than new or disadvantaged entrants. The OECD wants subsidy rates cut for current employees under the Apprenticeship Levy and the cash redirected to young people and early school-leavers. It also calls for extra resources for high-quality teaching in the most deprived schools.
- Female labour-force participation: Women are over-represented among the economically inactive, largely because of childcare costs. The government’s ongoing childcare expansion is welcome, but the OECD warns of staff shortages and poor contingency planning. It urges interim milestones, prioritising low-income families if supply is short, and extending full support to active job-seekers. Funding rates should be reviewed regularly to balance quality and cost.
- Physical infrastructure governance: The UK has a solid delivery system but needs stronger long-term planning and independent oversight to protect against integrity risks in big projects.
- Public governance: Conflict-of-interest rules for ministers and senior officials are too weak. The Ministerial Code on post-office business appointments isn’t legally binding. The OECD wants legal liability extended and the online lobbying register made more searchable and transparent.
The report also flags the need to improve school-to-work transitions and reduce unnecessary complexities across the board.
Across the rich world, productivity growth has stalled for two decades while AI and digital technologies offer a potential new boom, if countries get the policy settings right. Britain, with its post-Brexit investment slump and ageing-related labour shortages, can’t afford to let structural bottlenecks fester, the OECD warns.
“Structural reforms are most powerful when they are coherent and complementary,” the report notes. Fixing the tax system, boosting skills, and easing childcare barriers would reinforce each other, lifting both growth and fairness.
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