Britain’s economy is expected to grow slower than before next year, the government’s official forecaster has said.
The Office for Budget Responsibility (OBR), which predicts how the economy will perform based on the government’s tax and spending policies, raised its growth expectations for this year, but lowered its forecast for the next four years.
It said low productivity growth – a measure of the economy’s output per hour – was behind the weak growth forecast.
The OBR’s forecast was published by mistake before Chancellor Rachel Reeves presented her Budget on Wednesday.
The OBR apologized, calling it a “technical error” and said it was investigating how the error occurred. Reeves said the mistake was “extremely disappointing”.
In its forecast, the OBR estimated the economy would grow by 1.5% this year, up from its previous estimate of 1%.
However, it said growth would be 1.4% in 2026 and 1.5% over the next four years – all downgrades from the forecast made in March.
“We expect quarterly growth to accelerate only slowly in the near term as geopolitical uncertainty remains and domestic business and consumer confidence remains weak, including fears of further tax rises,” the OBR said.
The growth rate was previously expected to reach 1.9% next year, 1.8% in 2027, 1.7% in 2028 and 1.8% in 2029.
In his Budget speech, the Chancellor said the Government had “beaten” growth forecasts this year and “we will beat them again”.
The government has made growing the economy its number one resolution in an effort to boost living standards across the UK.
When an economy grows, businesses, on average, have more money to spend to create more jobs or give wage increases. Workers then spend more of their disposable income and pay more in taxes to the government. Whereas firms earning more profits will also pay more taxes.
The decline in growth was the result of the OBR lowering its expectations for UK productivity by 0.3 percentage points. It said the expected economic recovery after recent shocks, such as the Covid pandemic and the energy price crisis, “has not succeeded”.
“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 a historical and international context.”
The decline in growth rates from the following year was the result of the OBR reducing its expectations for UK productivity by 0.3 percentage points. It said the expected economic recovery after recent shocks, such as the Covid pandemic and the energy price crisis, “has not succeeded”.
“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 a historical and international context.”
Separately, the OBR said, a decline in productivity growth could reduce government revenues by about £16 billion in 2029-30.
However, the government has announced a number of revenue boosting measures, including freezing the income tax range for the next three years from 2028.
It is estimated that the cap in the range in 2029–30 will result in 780,000 more income tax basic-rate taxpayers, 920,000 more people paying the higher-rate, and 4,000 more people paying the additional-rate.
As well as tax rises, the OBR said the Chancellor’s budget policies would increase spending each year by up to £11 billion in 2029–30, mainly paid for by “changes to welfare cuts and the lifting of the two-child limit in Universal Credit”.
As a result of the measures announced on Wednesday, the OBR said the Chancellor has doubled the buffer against its financial rules to almost £22 billion.
Reeves has two main financial rules:
- No borrowing for everyday public spending until the end of this Parliament
- To reduce government debt as a share of national income by the end of this Parliament
Such regulations are self-imposed by most governments in wealthy countries and are designed to maintain credibility with financial markets.
In an effort to reassure such markets, Reeves has been keen to emphasize that his rules are “made of iron”.
Following the leak of the OBR report, there was little volatility in the UK bond market before gilt yields – which indicate the cost of government borrowing – fell below levels seen before the details were leaked.
The OBR said it expects inflation this year to be 3.5% – slightly higher than the forecaster’s previous estimate of 3.2% in March.
It raised next year’s inflation forecast to 2.5% from 2.1%, but the rate is expected to fall to 2% in 2027 and the following two years.
Inflation, which measures the pace of price increases, is expected to hit a recent peak of 3.6% in the year to October.
The UK employment rate is currently 5% and the OBR said it expects it to remain around that level until 2027.
The OBR expects earnings to grow by an average of 3% between 2025 and 2029, up 2.7% from its previous forecast.
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