UK growth forecasts lowered from next year

The UK economy is expected to grow at a slower rate than previously expected from next year, the government's official forecaster has said.

The Office for Budget Responsibility (OBR), which maps out how the economy is set to perform based on the government's tax and spending policies, increased its growth expectations for this year, but downgraded its forecast for the following four.

It said lower productivity growth - a measure of output of the economy per hour worked - was behind the weaker growth forecast.

The OBR's forecast was published in error ahead of the Chancellor Rachel Reeves delivering her Budget on Wednesday.

The OBR apologised for what it called a "technical error" and said an investigation was under way into how the error occurred.

Reeves said the mistake was "deeply disappointing".

In its forecast, the OBR predicted the economy would grow by 1.5% this year, higher than its previous estimate of 1%.

However, it said growth would be lower at 1.4% in 2026 and 1.5% in the following four years - all of which are downgrades from its forecast made in March.

"We expect quarterly growth to pick up only gradually in the near term as geopolitical uncertainty persists and domestic business and consumer confidence remains subdued, including in anticipation of further tax rises," the OBR said.

Previously growth had been expected to hit 1.9% next year, 1.8% in 2027, 1.7% in 2028 and 1.8% in 2029.

In her Budget speech, the chancellor said the government had "beat" the growth forecast this year and "we will beat them again".

The government has made growing the economy its number one pledge an effort to boost living standards across the UK.

When an economy grows, businesses on average have more money to spend to created more jobs or give pay rises. Workers then tend to spend more of their disposable income and pay more in tax to the government. while firms making more profits will also pay more in tax.

The downgrade in growth was a result of the OBR lowering its expectations for the UK's productivity by 0.3 percentage points. It said expected economic rebounds following recent shocks, such as the Covid pandemic and energy price crisis, had "not materialised".

"This decision is not a reflection of any particular government polices," it added.

"It is based on our latest assessment of the UK's productivity performance in historical and international context."

The OBR said, in isolation, the reduction in productivity growth could have lowered government revenues by about £16bn in 2029-30.

However, the government has announced a number of revenue raising measures, including freezing income tax thresholds for a further three years from 2028.

The freeze in thresholds is forecast to result in 780,000 more income tax basic-rate taxpayers, 920,000 more people paying the higher-rate, and 4,000 more paying the additional-rate in 2029-30.

As well as tax rises, the OBR said the chancellor's Budget policies would increase spending in every year and by £11bn in 2029-30, primarily to pay for "reversals to welfare cuts and lift the two-child limit in universal credit".

As a result of the measures announced on Wednesday, the OBR said the chancellor had doubled the buffer against her fiscal rules to some £22bn.

Reeves's has two main fiscal rules:

• Not borrowing to fund day-to-day public spending by the end of this parliament

• Getting government debt falling as a share of national income by the end of this parliament

Such rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets.

Reeves has been keen to stress her rules are "iron clad" in an effort to assure such markets.

Following the leak of the OBR's report, there was brief spell of volatility in the UK bond market before gilt yields - which give an indication of government borrowing costs - fell back to below the level they had been at before the detaisl leaked.

The OBR said it expects the rate of inflation to be 3.5% this year - which is slightly higher than the forecaster's previous estimate in March of 3.2%.

It also lifted next year's inflation forecast from 2.1% to 2.5%, but the rate is then expected to fall to 2% in 2027 and the following two years.

Inflation, which measures the pace of price rises, is expected to have reached a recent peak of 3.6% in the year to October.

The UK's employment rate is currently at 5% and the OBR said it expects it to remain around the same level until 2027.

The OBR expects earnings to grow on average by 3% between 2025 and 2029, up from 2.7% from its previous forecast.