By Fatma Younis
The Office for Budget Responsibility (OBR) has warned that UK inflation will surge to a peak of around 3.75% by the start of next year, significantly higher than previous forecasts, while economic growth is set to slow sharply in 2027.
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 jump is largely driven by a sharp rise in household energy bills in January, and the 2% target is not expected to be met until 2028.
Growth outlook cut
Gross domestic product is now forecast to grow 1.2% this year, slightly above the previous 1.1% estimate. However, growth is expected to slow to just 1% next year, a substantial downgrade from the 1.6% previously predicted. The outlook improves thereafter, with growth of 1.6% in 2028, 1.8% in 2029, 1.7% in 2030 and 1.6% in 2031.
Borrowing and fiscal headroom
Chancellor John Healey confirmed fiscal headroom will be reduced to £15 billion in 2029/30, down from a previous £26 billion, after a £15 billion increase in debt interest costs. Government borrowing is expected to exceed earlier forecasts by around £18 billion this year, £16 billion in 2027/28, and an average of £11 billion annually thereafter. Borrowing as a share of GDP is projected to fall from 4.2% this year to 1.8% in 2030/31.
National debt and unemployment
Public sector net debt is set to rise from 96% of GDP this year to 97% in 2028/29 before edging back to 96% in 2031. Unemployment is forecast at 5% this year, lower than the 5.3% previously expected, rising to 5.1% in 2027 and then easing to 4.9% in 2028 and 4.5% in 2029.
