OBR cuts 2027 growth forecast to 1% and warns household incomes will fall

The Office for Budget Responsibility has cut its forecast for UK growth next year to 1% and warned that household incomes will fall over the next two years, in a report published on Wednesday afternoon alongside John Healey's first Budget as Chancellor.

The independent forecaster blames higher energy prices caused by the war in the Middle East for the downgrade, which comes seven months after its March forecast had growth averaging 1.6% a year over the rest of the decade. The Guardian reported that the forecaster described the outlook for living standards as "a pretty grim picture".

The forecast means Healey has delivered a Budget built around cost of living support while the OBR expects the squeeze on households to deepen. The forecaster now expects real household disposable income per person to fall by an average of 0.4% a year in 2026 and 2027, having predicted in March that it would rise by 0.4% a year.

The OBR has raised its growth forecast for this year to 1.2%, from 1.1% in March, but expects the economy to slow to 1% in 2027 before recovering to 1.6% in 2028, 1.8% in 2029, 1.7% in 2030 and 1.6% in 2031, according to figures Healey read out in the Commons.

Inflation is forecast to stay well above the Bank of England's target. "We expect higher energy prices to push up CPI inflation to around 3½ per cent in 2027", the OBR said in a post on X after publication. In March it had expected inflation of 2% next year. The consumer prices index rose to 3.5% in September, up from 3.1% in August.

The forecaster expects Bank Rate, which currently stands at 3.75%, to reach just over 4¼% by the middle of 2027.

Healey told MPs the country faced "global economic storms" and said the conflict was the main reason for the worse outlook. "The OBR sets out that the war in the Middle East is a key driver affecting today's forecasts," he said.

He announced a one-off £100 payment to 20 million households in council tax bands A to D, at a cost he put at £2.6bn, and said the gas standing charge would be abolished. The VAT cut on electricity will be extended to July, which Healey said would take £50 off the annual price cap, and the cut to fuel duty will run until July 2027.

The National Minimum Wage and National Living Wage will rise by 3.9%, affecting 2.3 million workers. Healey also set aside £20.4bn more for the National Wealth Fund and the British Business Bank.

The Resolution Foundation, a think tank that focuses on living standards, called the outlook "dire" and described the energy support as "badly targeted". In its analysis of the OBR figures, the foundation said real household disposable income per person was now £420 lower than two years ago and would not recover that ground until 2029.

Borrowing is higher than the Treasury expected in the spring. Public sector net borrowing is forecast at £133bn this financial year, almost £18bn more than the £115bn the OBR projected in March. Healey said borrowing would fall from 4.2% of GDP this year to 3.4% next year, 2.9% in 2028/29, 2.1% in 2029/30 and 1.8% in each of the following two years.

The Chancellor said he was keeping £15bn of headroom against his stability rule in 2029/30, rising to £22bn in 2030/31. "More than ever, it underwrites every promise this Government makes to the British people," he said of fiscal discipline.

Healey, who succeeded Rachel Reeves as Chancellor in July, said the economy had outperformed the OBR's predictions before and told MPs: "I believe Britain can beat the forecast again,"

City AM reported that the OBR had said Healey would need to find a further £11bn to stop day-to-day spending falling by 2.6% in real terms over the final three years of the forecast. The same outlet reported that the forecast assumes energy prices return to pre-war levels by 2028.

The Resolution Foundation said that if past forecasting errors were repeated, the current budget could be in deficit by around £26bn in 2029/30, and that debt interest costs had risen by about £2bn since the OBR closed its forecast.

The OBR's full Economic and Fiscal Outlook was published after Healey sat down, with Reuters, ITV and LBC among the outlets to carry the growth and borrowing figures from the Chancellor's speech. The opposition parties had yet to set out their formal responses to the forecast on Wednesday afternoon.