OBR cuts UK growth outlook as Middle East conflict fuels cost-of-living pressures

The Office for Budget Responsibility (OBR) lowered its projection for UK economic growth in 2027 and warned that household disposable incomes are likely to remain flat, attributing the downturn to the war in the Middle East and the resulting energy-price shock. While the OBR raised this year’s growth estimate to 1.2% after an unexpectedly strong performance driven by AI investment, it cut the forecast for next year from 1.5% to 1%.

John Healey presented his first budget with measures aimed at easing energy costs for households and businesses, including a £100 blanket payment for 20 million families and the removal of standing charges on gas bills. He also announced a temporary increase in a tax on banks to fund the energy-support package and reduced the fiscal buffer to £15 billion, down from the £23.6 billion left by his predecessor.

“If you go back to just before Covid, and take that as your base, where we are right now – seven years later, is virtually no growth in per-person real household disposable income,” said David Miles of the OBR.

“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,” Healey said.

The OBR expects inflation to reach about 3.5% this year, higher than the 2% forecast made in March, and projects borrowing to fall to roughly 2% of GDP in the medium term, albeit more slowly than previously anticipated. It warned that if energy prices continue to rise, borrowing could be £17 billion above the central forecast, while a lower-price scenario could reduce borrowing by £12 billion.

The outlook remains highly uncertain, with the OBR noting that outcomes related to energy prices are roughly equally likely to be significantly better or worse.