OBR forecasts 1% UK growth in 2027 as war lifts prices

Households in the United Kingdom face a £2.6 billion package of cash payments and a plan to remove standing charges from gas bills as the government attempts to offset the cost of living squeeze caused by the Middle East war. Chancellor John Healey presented these measures in his first budget on Tuesday, a day after the Office for Budget Responsibility released a report that slashed the country’s growth outlook.

The OBR cut its forecast for economic growth in 2027 from 1.5% to 1%. The watchdog stated that the war has created a multibillion pound setback for the economy and that early resilience to the conflict is fading. It now expects consumer inflation to approach 4% by that time, a sharp rise from the 2% target set by the central bank.

The economic picture for the current year is stronger than previously thought. The OBR raised its growth estimate for 2026 from 1.1% to 1.2%, citing an unexpectedly solid performance driven by investment in artificial intelligence. Official figures showed that the UK recorded the fastest growth among G7 nations in the first half of the year, with strong expansion in AI related business activity contributing to the result.

Healey explained that the government is spending £14 billion more on debt interest because market fallout from the conflict is increasing borrowing costs for governments globally. To fund his energy support package, he announced a temporary rise in tax on banks. He left £15 billion of headroom against the main fiscal rule, which requires day to day spending to be covered by tax receipts in three years. This buffer is smaller than the £23.6 billion left by his predecessor Rachel Reeves in the spring.

The OBR expects consumer inflation to reach 3.5% this year, well above the 2% forecast made in March. The watchdog noted that borrowing is set to fall to about 2% of GDP over the medium term, though the decline will be slower in the near term than earlier plans assumed. It also warned that inflation adjusted disposable income per person will fall in the short term before rising modestly. Income levels are expected to be only about 2% above pre pandemic levels by the start of the 2030s.

Healey said he wanted to harness AI to lift future growth while protecting the country against cyber attack risks as the global AI race accelerates. He pointed to signs of resilience in the economy, noting that both the Bank of England and the International Monetary Fund had upgraded their UK growth forecasts in recent months. He stated that Britain has beaten the forecasts this year and that his actions today would allow the country to beat them again.

The energy shock is the primary driver of the worsening outlook. Since the US and Israeli led invasion of Iran at the end of February disrupted energy flows, oil prices have climbed from about $70 a barrel to more than $115. Gas prices have almost tripled in the same period. With a tentative pause in fighting as Donald Trump prepares for midterm elections, the OBR described the outlook as highly uncertain, noting that better or worse outcomes are of broadly equal probability. A higher and more sustained energy price peak could push borrowing £17 billion above the central forecast next year, while a lower price path could cut it by £12 billion.