The Office for Budget Responsibility released its assessment of the UK economy alongside Chancellor John Healey’s initial budget announcement, delivering significantly downgraded forecasts for economic growth and household finances. The watchdog reduced its projection for growth in next year to 1%, down from a previous estimate of 1.5%, citing the impact of escalating energy costs stemming from regional conflict. Most notably, the independent forecaster warned that household disposable incomes adjusted for inflation would decline by 0.6% in the coming year, reversing an earlier forecast that had anticipated a 0.6% increase in real incomes.
The broader outlook for British families remains challenging, with the watchdog characterizing the medium-term trajectory as among the weakest decades for growth in real household income documented in records spanning back to the 1960s. An OBR official described the situation as a “pretty grim picture,” noting that per-person real household disposable income seven years after the start of the Covid pandemic would show virtually no growth compared to pre-pandemic levels. The forecaster projected that disposable incomes by 2029 would be only 1% higher than they were in 2019, painting a stark contrast to typical historical patterns of income growth.
In response to these headwinds, Healey announced measures intended to ease pressure on household budgets, including direct payments to millions of households and plans to eliminate standing charges on gas bills. The chancellor also noted that heightened borrowing costs driven by global financial market turbulence have required an additional £14 billion in government spending on debt servicing. While the government is reducing its fiscal buffer against spending rules to accommodate support policies, the OBR projects that long-term borrowing will eventually fall to approximately 2% of gross domestic product.
The economic outlook carries substantial uncertainty, with the forecaster identifying multiple scenarios of comparable probability. Energy prices remain a critical variable, having risen sharply since the onset of conflict at the end of February, with oil prices climbing from approximately $70 per barrel to over $115. The OBR indicated that sustained higher energy prices could increase government borrowing by £17 billion beyond its central forecast, while a lower energy price environment could reduce borrowing by £12 billion. Despite these pressures, Healey highlighted signs of economic resilience recorded earlier in the year, including stronger-than-expected growth driven partly by expansion in artificial intelligence-related business activity.
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