OBR Slashes UK 2027 Growth Outlook to 1% on Energy Shock

Britain's independent fiscal watchdog has cut its growth forecast for next year from 1.6% to 1%, despite Chancellor John Healey's first budget deploying billions in energy support for households and businesses. The Office for Budget Responsibility's downgrade lands alongside a warning that inflation is poised to reach close to 4% as the war in the Middle East drains Britain's early economic resilience.

The numbers frame a budget built under pressure. Growth this year was actually upgraded from 1.1% to 1.2%, after an unexpectedly strong performance fuelled by AI investment. But the 2027 cut is the real story — a 0.6 percentage-point haircut driven by an energy price shock rippling out from the Gulf conflict.

What does the war cost the Treasury?

Healey put a hard figure on it: the exchequer is spending £14bn more on debt interest, as financial market fallout from the conflict pushes up government borrowing costs worldwide. Since the US-Israeli led invasion of Iran began at the end of February, oil has climbed from about $70 a barrel to more than $115, and gas prices have almost tripled.

That squeeze shows up directly in the chancellor's fiscal headroom. Healey left £15bn of room against the main fiscal rule — which requires day-to-day spending to be matched by tax receipts in three years' time. That's down sharply from the £23.6bn his predecessor Rachel Reeves banked in the spring. Roughly a third of the cushion is gone in six months.

To fund his energy package, Healey announced a temporary rise in tax on banks. The OBR said borrowing should still fall to about 2% of GDP in the medium term, but at a slower near-term pace than previous plans allowed.

What does this change for households?

Inflation is the immediate hit. The OBR now expects consumers to face 3.5% inflation this year, significantly above the 2% forecast in March — a near-doubling in six months that lands squarely on energy bills.

Healey's countermeasures include:

• £100 in blanket payments for 20 million households, at a cost of £2.6bn
• A plan to abolish standing charges on gas bills
• Broader "breathing space" policies for households and businesses facing soaring energy costs

The OBR still warns that households face sustained pressure. Per-person disposable incomes, adjusted for inflation, are expected to fall in the short term before rising modestly before the end of the current parliament. By the start of the 2030s, income levels will sit only about 2% above pre-pandemic levels — a lost decade in all but name, and a tough backdrop for Labour's election run-up.

Where's the good news?

Britain's economy has outperformed. It recorded the strongest growth rate in the G7 in the first half of 2026, with official figures pointing to a strong expansion in AI-related business activity as one factor behind the surprise. The Bank of England and the International Monetary Fund have both issued growth upgrades for the UK in recent months.

Healey used the budget to harness that momentum, pairing AI-driven growth measures with safeguards against cyber-attack risk amid the accelerating global AI race. He told MPs: "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 he would never be complacent, while pointing to "signs of resilience" in the economy.

How uncertain is the outlook?

The OBR was blunt about the limits of its own forecast. With a tentative pause in the fighting while Donald Trump prepares for midterm elections, the watchdog described the outlook for the economy, households and public finances as highly uncertain — with "significantly better or worse outcomes of broadly equal probability."

The spread is wide. If energy prices hit a higher, more sustained peak, government borrowing could come in £17bn above the central forecast next year. A lower energy price path could cut borrowing by £12bn instead. For businesses planning budgets and investors pricing gilts, that £29bn range is the number to watch.