UK growth forecast cut to 1% for 2027 as energy shock lifts inflation

Forecast downgrade for 2027

The Office for Budget Responsibility (OBR) published its forecasts on Wednesday, 28 October, alongside John Healey's first Budget as chancellor. It was the watchdog's first assessment of the UK economy since the Middle East conflict began, and it named rising energy prices as the biggest near-term risk. The OBR lifted its growth estimate for this year to 1.2% from 1.1%, but cut next year's figure from 1.6% to 1%. Growth is then forecast to recover to 1.6% in 2028, before rising to 1.8% in 2029, 1.7% in 2030 and 1.6% in 2031.

2026

1.2 %

2027

1 %

2028

1.6 %

2029

1.8 %

2030

1.7 %

2031

1.6 %

Data from the article text

Inflation and fuel costs

The OBR expects inflation to run faster than it previously projected. LBC reports a peak of around 3.75% by the start of next year, driven by a jump in household energy bills in January, while the BBC gives a peak of 3.8% in 2027. Inflation is not expected to reach the Government and Bank of England's 2% target until 2028. LBC puts average inflation at 3.1% this year and 3.4% in 2027, against earlier forecasts of 2.3% and 2%. The Guardian reports a higher figure of 3.5% for this year, a difference the sources do not explain. Petrol already averages almost £1.73 a litre and diesel near £1.99, according to the BBC, and economists at Pantheon Macroeconomics judged the government's cost-of-living support too small for the inflation they expect over the winter.

Budget measures and public finances

Healey announced a temporary rise in tax on banks, and the Irish Times says the package also includes higher taxes on the gambling sector and property. The money funds cost-of-living support, including £100 blanket payments for 20 million households at a cost of £2.6bn, according to the Guardian. LBC reports that VAT will be removed from electricity bills and the standing charge removed from gas bills. The chancellor left £15bn of headroom against the main fiscal rule, down from the £23.6bn left by his predecessor Rachel Reeves in the spring, the Guardian reports. LBC and the Independent give a headroom of £15bn in 2029/30, down from a previous prediction of £26bn, after a jump in debt interest costs. The Independent puts that jump at £14bn for the past year, while LBC gives £15bn for the current year.

Previous prediction26

2029/30 forecast15

Previous prediction

26 £bn

2029/30 forecast

15 £bn

Data from the article text

“What we face today are global economic storms. We can't wish them away. We must choose the course we steer through them.”

Healey framed the Budget as offering breathing space to households in the coming months. The OBR's Budget package also includes a commitment to raise defence spending to 3% of GDP by 2030, but details of how this will be achieved are not due until 2027, when plans to reduce spending are also expected, according to the Irish Times.

Living standards stay flat

The Financial Times reports that the OBR expects real household disposable income per person to be just 1% above its pre-pandemic level in 2029-30. The forecast marks a sharp downgrade from the OBR's March forecasts, with real incomes falling outright in the near term. David Miles, a senior OBR official, said the decade would see growth averaging 0.1% a year, the weakest outcome in records going back to the 1950s, compared with typical rates of 2% before the 2008 financial crisis.

“It's been a dismal period in British economic history”

Miles attributed the near-term downgrade mainly to higher energy prices, while the freeze in personal tax thresholds adds to the pressure. He said taxes would reach roughly 6% of GDP more than before Covid by the end of the forecast period. Real earnings are not expected to rise in 2027 or 2028, and real wage growth is forecast to recover to just 0.5% in 2030 as companies rebuild profit margins. Ruth Curtice, chief executive of the Resolution Foundation, said the forecasts point to a very poor decade for living standards and criticised the cost-of-living measures.

Political and editorial reaction

The Irish Times said the Budget left two big items unresolved. Andy Burnham, described as the newish prime minister, set out no statement of intent on the direction he wants for the country. The paper also argued that the measures were marginal for growth, and that the Conservatives were attacking Burnham's wish to forge closer ties with the EU, or possibly rejoin it. It put national debt at about £3 trillion, or 95% of GDP, and the 10-year government bond yield at 5.25%. LBC reported that the yield on 10-year gilts eased by two basis points after the Budget despite the reduced headroom.