OBR Revises UK Growth Outlook Downward Amid Rising Energy Costs

Households in Britain can expect a new squeeze on their costs as the government’s independent forecaster lowered its growth outlook for next year. The Office for Budget Responsibility, or OBR, published a report on October 28 that projects a 1% growth rate for 2027. This figure is lower than the 1.5% estimate provided in earlier forecasts.

The downgrade comes as Chancellor John Healey presented his first budget. Healey described his policy measures as providing breathing space for families and businesses facing high energy bills. Despite these interventions, the OBR warned that inflation is on track to reach 4% as the country’s initial resilience to the Middle East war fades.

The economic picture for the current year appears stronger than for the future. The OBR raised its growth estimate for 2026 from 1.1% to 1.2%. This upward revision reflects an unexpectedly solid performance, driven largely by investment in artificial intelligence. Britain recorded the fastest growth among G7 nations in the first half of 2026, with official data showing strong expansion in AI-related business activity.

Healey addressed the rising cost of government borrowing, noting an additional £14bn in debt interest payments. These costs have increased due to market fallout from the conflict, which is pushing up borrowing rates globally. He announced a temporary tax increase on banks to fund the energy support package. He also decided to accept a smaller fiscal buffer, leaving £15bn of headroom against the main fiscal rule. His predecessor, Rachel Reeves, had left £23.6bn in the spring.

To help with the cost of living, Healey introduced blanket payments of £100 for 20 million households. This measure will cost the government £2.6bn. He also announced plans to abolish standing charges on gas bills. The OBR expects consumer inflation to reach 3.5% this year, well above the 2% forecast from March.

The forecaster projected that inflation-adjusted disposable income per person will fall in the short term. It will rise modestly before the end of the current parliament. By the start of the 2030s, income levels are expected to be only about 2% above pre-pandemic levels. Borrowing is set to fall to about 2% of GDP over the medium term, though this will happen more slowly than previously planned.

Energy prices have surged since the US and Israel led an invasion of Iran at the end of February. Oil prices have climbed from roughly $70 per barrel to over $115. Gas prices have nearly tripled. Healey stated that he wants to use AI to lift future growth while protecting the country from cyber-attack risks. He cited signs of resilience, noting that the Bank of England and the International Monetary Fund had recently upgraded their UK growth forecasts.

The OBR highlighted the uncertainty in its projections due to a tentative pause in fighting while Donald Trump prepares for midterm elections. The report stated that significantly better or worse outcomes have broadly equal probability. A higher and more sustained energy price peak could push borrowing £17bn above the central forecast next year. A lower price path could reduce borrowing by £12bn.