UK economy growth forecasts lowered from next year

The UK economy is now predicted to grow at a slower rate than previously expected from next year, the government’s official forecaster has said.

The Office for Budget Responsibility (OBR), which maps out how the economy is set to perform based on the government’s tax and spending policies, increased its growth expectations for this year, but downgraded its forecast for the following four.

It said lower productivity growth – a measure of output of the economy per hour worked – was behind the weaker growth forecast.

The watchdog said spending on public services would increase over the next five years, but warned tax rises over the period would put the total take at an all-time high.

The downgrade to growth in the OBR’s forecast is a blow to the government, which has made growing the UK economy its main pledge in an effort to boost living standards across the UK.

The OBR now predicts the economy will expand by 1.5% this year, higher than its previous estimate of 1%.

However, it lowered its growth estimates to 1.4% in 2026 and 1.5% in all of the following four years.

The OBR said it expected growth to “pick up only gradually” in the near term due to uncertainty persisting through conflicts and trade across the world, adding UK businesses and consumer confidence remained “subdued, including in anticipation of further tax rises”.

However, in her Budget speech, Chancellor Rachel Reeves said the government had “beat” the growth forecast this year and “we will beat them again”.

“Brick by brick we’ve been building growth in our economy. Building roads, building homes, getting spades in the ground and cranes in the sky,” she said.

When an economy grows, businesses on average have more money to spend to create more jobs or give pay rises and workers have more cash to spend.

As a result, more tax is paid to the government, which can be used to increase funding to public services, such as schools, hospitals and the police.

“While the government places growth at the heart of its ambitions, the factors driving that growth may be out of the government’s control, decided by the, largely unknowable, impact of new technologies,” said Yael Selfin, chief economist at KPMG.

The OBR, which is independent of the government, apologised on Wednesday for publishing its growth forecast in error ahead of the chancellor delivering her Budget on Wednesday. Reeves said the mistake was “deeply disappointing”.

The downgrade in growth was a result of the OBR lowering its expectations for the UK’s productivity by 0.3 percentage points.

The forecaster also said expected economic rebounds following shocks in recent years, such as the Covid pandemic and energy price crisis, had “not materialised”.

“This decision is not a reflection of any particular government policies,” it added. “It is based on our latest assessment of the UK’s productivity performance in historical and international context.”

The watchdog said, in isolation, the reduction in productivity growth could have lowered government revenues by about £16bn in 2029-30, but was offset by a boost in revenues for the Treasury due to higher inflation, wages and increased VAT receipts.

The chancellor’s main tax revenue raiser in the Budget was extending the freeze in income tax thresholds for a further three years from 2028.

The freeze in thresholds is forecast to result in 780,000 more income tax basic-rate taxpayers, 920,000 more people paying the higher rate, and 4,000 more paying the additional rate in 2029-30.

The OBR highlighted that the tax burden on the economy would hit record levels by the end of the parliament, with an increase of £26bn by the 2029-30 financial year.

However, it added public spending would increase in every year and by £11bn in 2029-30, primarily to pay for “reversals to welfare cuts and lift the two-child limit in universal credit”.

As a result of the measures announced on Wednesday, the chancellor doubled the buffer against her fiscal rules to about £22bn.

Reeves has two main fiscal rules:

• Not borrowing to fund day-to-day public spending by the end of this parliament
• Getting government debt falling as a share of national income by the end of this parliament

Such rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets.

Reeves has been keen to stress her rules are “non-negotiable” in an effort to assure the markets, who pay close attention to the OBR’s assessment of the government’s policies.

But while forecasts are taken seriously, they are only a best estimate of what might happen in an uncertain world, meaning they are often wrong – hence the revisions in this Budget from the Spring Statement.

Following the early publication of the OBR’s report, there was a brief spell of volatility in the UK bond market before gilt yields – which give an indication of government borrowing costs – fell back to below the level they had been before the leak.

The OBR said it expects the rate of inflation to be 3.5% this year – which is slightly higher than its previous estimate of 3.2%. It expects the rate to fall further over the coming years towards the Bank of England’s 2% target.

Inflation, which measures the pace of price rises, is expected to have peaked at 3.6% in the year to October.