OBR Slashes UK Growth Forecast for 2027 from 1.6% to 1%, Warns Inflation Could Reach Close to 4%

Britain's independent government forecaster, the Office for Budget Responsibility (OBR), has sharply downgraded its forecast for the growth of the British economy. In a report published as Chancellor John Healey announced his first budget, the body downgraded its forecasts for growth, living standards and the public finances.

Although the OBR raised its estimate for growth this year from 1.1% to 1.2%, it slashed its forecast for next year from 1.6% to 1%.

The body said consumers would face inflation of 3.5% this year, significantly higher than the 2% forecast in March. The OBR also warned that inflation was poised to reach close to 4%.

Healey said the exchequer was spending £14bn more on debt interest as the financial market fallout from the war in the Middle East pushes up borrowing costs for governments worldwide.

The chancellor left £15bn of headroom against his main fiscal rule, down from the £23.6bn left by his predecessor Rachel Reeves in the spring. Under the rule, day-to-day spending must be matched by tax receipts in three years' time.

The OBR said borrowing was poised to fall to about 2% of GDP in the medium term, but at a slower near-term pace than previous plans.

Healey made helping families with the cost of living a core focus of his first budget, including £100 in blanket payments for 20m households at a cost to the exchequer of £2.6bn and a plan to abolish standing charges on gas bills. He also announced a temporary rise in tax on banks to fund his package of energy support.

But despite those measures, the OBR warned households would come under sustained pressure, with per-person disposable incomes taking account of inflation expected to fall in the short term, before rising modestly before the end of the current parliament. The watchdog said income levels would only be about 2% above pre-pandemic levels by the start of the 2030s.

Britain recorded the strongest rate of growth in the G7 in the first half of 2026. Official figures suggested a strong expansion in AI-related business activity as one factor behind the surprise rise.

Healey sought to use his budget to harness the power of technology to boost growth in future while also safeguarding the country against the risk of cyber-attacks amid the accelerating global AI race.