Budget Watchdog Cuts UK Growth Forecast for 2027 as Middle East War Lifts Prices

Britain's economy faces a multibillion-pound setback as the war in the Middle East weighs on growth and sparks a new cost of living squeeze, according to the government's independent forecaster. The Office for Budget Responsibility (OBR) made the assessment in a report published as Chancellor John Healey presented his first budget.

The watchdog sharply lowered its projections for growth, living standards and the public finances, even after accounting for the chancellor's measures. Healey had offered what he described as "breathing space" policies to help households and businesses cope with soaring energy costs. Even so, the OBR cut its 2027 growth forecast from 1.5% to 1% and cautioned that inflation was on course to approach 4% as the country's early resilience to the conflict fades.

The picture for this year is somewhat brighter. 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. Britain recorded the fastest growth in the G7 in the first half of the year, and official figures pointed to a strong expansion in AI-related business activity as one factor.

Healey said the government was spending £14bn more on debt interest because the market fallout from the conflict is pushing up borrowing costs for governments around the world. Given the uncertain global backdrop, he said he would accept a smaller buffer against the government's fiscal rules, while also announcing a temporary rise in tax on banks to pay for his energy support package.

He left £15bn of headroom against the main fiscal rule, which requires day-to-day spending to be covered by tax receipts in three years' time. His predecessor, Rachel Reeves, had left £23.6bn in the spring. The OBR said borrowing was set to fall to about 2% of GDP over the medium term, but more slowly in the near term than earlier plans had assumed. It also expects consumer inflation of 3.5% this year, well above the 2% it forecast in March.

Cost of living help was central to the budget. Healey announced blanket payments of £100 for 20 million households, costing the exchequer £2.6bn, along with a plan to abolish standing charges on gas bills. The OBR nonetheless warned of sustained pressure on families. It expects inflation-adjusted disposable income per person to fall in the short term before rising modestly ahead of the end of the current parliament, leaving income levels only about 2% above pre-pandemic levels by the start of the 2030s. That sets up a difficult run-up to the next election for Labour.

The chancellor also 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 the Bank of England and the International Monetary Fund had both upgraded their UK growth forecasts in recent months. "There are real challenges ahead but Britain has beaten the forecasts this year, and with the action I am taking today I believe Britain can beat the forecasts again," he said.

Pressure is nonetheless building from the energy shock. Since the US-Israeli led invasion of Iran at the end of February disrupted energy flows in the region, oil has climbed from about $70 a barrel to more than $115, and gas prices have almost tripled.

With a tentative pause in fighting as Donald Trump prepares for crucial midterm elections, the OBR stressed that the outlook remains highly uncertain. It described "significantly better or worse outcomes of broadly equal probability." A higher and more sustained energy price peak could push borrowing £17bn above its central forecast next year, while a lower price path could cut it by £12bn.