OBR slashes UK growth forecast for 2027 despite Healey’s budget measures

The Office for Budget Responsibility (OBR) has reduced its growth forecast for the UK in 2027, despite Chancellor John Healey's budget measures. The downgrade comes as the war in the Middle East continues to impact the economy, triggering a cost of living crisis. Healey attempted to ease the burden through "breathing space" policies for households and businesses grappling with soaring energy costs, but the watchdog still slashed its growth forecasts for 2027 and warned that inflation could reach close to 4%.

Growth this year was upgraded from 1.1% to 1.2% due to an unexpectedly resilient performance driven by AI investment, but the OBR reduced its estimate for next year to 1%. The exchequer is now spending £14bn more on debt interest due to financial market fallout from the conflict, pushing up borrowing costs globally. Healey announced a temporary tax rise on banks to fund his energy support package, leaving £15bn of headroom against fiscal rules.

However, the OBR predicts borrowing will fall to about 2% of GDP in the medium term but at a slower rate than previously projected. As the energy price shock from the Middle East hits households and businesses, consumers can expect inflation of 3.5% this year, much higher than the 2% forecast in March. Despite these challenges, the OBR acknowledges signs of economic resilience, citing upgraded growth forecasts from the Bank of England and International Monetary Fund.

The watchdog warns that households will face sustained pressure, with per person disposable incomes expected to fall in the short-term before rising modestly before the end of the current parliament.