By Fatma Younis
The Office for Budget Responsibility (OBR) has warned that UK inflation will surge to a peak of around 3.75% by early next year, significantly higher than previous forecasts, as Chancellor John Healey delivered his first autumn Budget.
Inflation driven by energy costs
The OBR said inflation will average 3.1% this year and 3.4% in 2027, up from earlier projections of 2.3% and 2% respectively. The spike is largely attributed to a jump in household energy bills in January, despite measures such as removing VAT from electricity bills and the standing charge from gas bills.
Growth outlook cut
Economic growth is expected to slow to 1% next year, down from a previous forecast of 1.6%. GDP is projected to grow 1.2% this year, slightly above the earlier 1.1% estimate, before recovering to 1.6% in 2028 and gradually rising to 1.8% in 2029.
Borrowing and debt rise
Government borrowing will exceed previous forecasts by around £18 billion this year and £16 billion in 2027/28, averaging £11 billion higher annually thereafter. Public sector net debt is set to rise from 96% of GDP this year to 97% in 2028/29 before falling back to 96% in 2031. Fiscal headroom has been reduced to £15 billion in 2029/30 from a previous £26 billion. The yield on UK 10-year gilts eased two basis points after the Budget despite the reduced headroom.
Living standards under pressure
Real household disposable income is forecast to fall slightly in the near term before improving as the energy shock eases. OBR member David Miles described the outlook for living standards as “a pretty grim picture,” noting virtually no growth in per-person real disposable income since before the pandemic.
Unemployment revised lower
The unemployment rate is now expected to hit 5% this year, lower than the previously predicted 5.3%, before rising to 5.1% in 2027 and easing to 4.9% in 2028 and 4.5% in 2029.
Budget context
Healey framed the Budget as providing “breathing space” for households amid a difficult domestic situation exacerbated by the turmoil of the Iran war.
