By Ahmed Abdelsalam
The Office for Budget Responsibility has painted a bleak picture for UK living standards, sharply downgrading its 2027 growth forecast from 1.6% to 1% as the Middle East war drives up energy costs and triggers a fresh cost-of-living crisis. The watchdog’s report accompanied Chancellor John Healey’s first budget, which included £100 payments to 20 million households and a plan to abolish gas standing charges.
Growth forecasts cut despite near-term upgrade
While the OBR raised its 2026 growth estimate from 1.1% to 1.2% after unexpectedly strong AI-driven expansion, it slashed the 2027 projection and warned inflation would reach 3.5% this year, well above the 2% forecast in March. Oil prices have surged from about $70 to over $115 a barrel since the US-Israeli led invasion of Iran in February, and gas prices have nearly tripled.
Household incomes stagnate since pre-pandemic
David Miles of the OBR said per-person real disposable income has seen virtually no growth in the seven years since before Covid, calling it “a pretty grim picture” and unusual in UK history. Even with the chancellor’s support measures, the watchdog expects disposable incomes to fall in the short term before a modest recovery by the end of the parliament.
Fiscal headroom reduced as borrowing costs rise
Healey left £15bn of headroom against his main fiscal rule, down from £23.6bn under his predecessor Rachel Reeves. The OBR said borrowing would fall to about 2% of GDP in the medium term but at a slower pace. Debt interest costs have risen by £14bn due to financial market fallout from the Gulf conflict.
Uncertainty dominates outlook
The OBR highlighted “significantly better or worse outcomes of broadly equal probability.” A higher sustained energy price peak could add £17bn to borrowing next year, while a lower path could reduce it by £12bn. Healey acknowledged “real challenges ahead” but insisted Britain could beat forecasts again.
