The Office for Budget Responsibility cut its UK growth forecast for 2027 to 1 percent from 1.6 percent. It published the forecast alongside Chancellor John Healey’s first budget. The watchdog also warned of higher inflation and weaker household incomes as the Middle East war feeds through to energy prices.
The OBR now expects UK growth of 1.2 percent in 2026, up from 1.1 percent. The upgrade for this year sits alongside a sharp downgrade for next year, which the watchdog attributed to the energy shock. Inflation is now forecast to reach 3.5 percent in 2026, against the 2 percent the OBR projected in March. It said inflation was poised to approach close to 4 percent.
Fiscal room narrows
Healey’s budget sets aside 15 billion pounds of headroom against the main fiscal rule. That is well below the 23.6 billion pounds Rachel Reeves left in the spring. Debt interest spending rises by 14 billion pounds as a result of the shock.
The OBR said borrowing was poised to fall to 2 percent of GDP in the medium term. Energy prices could move the picture either way. A higher, sustained peak could add 17 billion pounds to next year’s borrowing above the central forecast. A lower path could cut it by 12 billion pounds.
Support measures and living standards
Healey is paying a blanket cost-of-living payment of 100 pounds to 20 million households, at a cost of 2.6 billion pounds. He also announced a temporary rise in tax on banks to fund energy support.
The OBR estimated that household incomes would only return to 2 percent above pre-pandemic levels by the start of the 2030s. Healey said Britain had beaten forecasts this year. “There are real challenges ahead but Britain has beaten the forecasts this year, and with the action I am taking today I believe Britain can beat the forecasts again,” he said.
Related: Ukraine cuts 2026 GDP growth forecast to 0.1 percent · Hungary's growth seen at 1.7% in 2026, 2.6% in 2027
Source: Office for Budget Responsibility
