The UK’s economy is expected to exhibit slower growth than previously anticipated starting next year, according to the latest predictions from the Office for Budget Responsibility (OBR). While the OBR has adjusted its growth estimates upward for the current year, projecting a 1.5% expansion as opposed to the earlier forecast of 1%, it has lowered expectations for subsequent years. The OBR now projects growth rates of 1.4% in 2026 and 1.5% for each of the following four years.
The OBR attributes this revised forecast primarily to a decline in productivity growth, which is a measure of the economy’s output per hour worked. It noted that public spending is expected to rise over the next five years, but warned that proposed tax increases will lead to a record-high overall tax intake. Businesses and consumer confidence remain low, likely influenced by global uncertainties and the anticipation of further tax hikes.
In her recent Budget speech, Chancellor Rachel Reeves discussed the government’s commitment to economic growth, indicating that the current year’s performance exceeded expectations. Reeves emphasized infrastructure investments as a means to stimulate growth.
The OBR acknowledged that its downgraded growth forecast was not a reflection of specific government policies but rather its updated assessment of the UK’s productivity, contextualized against historical and international benchmarks. It also indicated that expected recoveries from past economic shocks, such as the COVID-19 pandemic and the energy crisis, have not fully materialized.
The report from the OBR included a notable decrease in productivity expectations, which could reduce government revenues significantly by 2029-30, although this may be offset by anticipated increases in inflation, wages, and VAT income. The government plans to extend the freeze on income tax thresholds, projected to increase the number of taxpayers across various rates. The OBR expects public spending to rise consistently, primarily to reverse welfare cuts and adjust the two-child limit in universal credit.
As the economy faces these challenges, the OBR projects inflation will average 3.5% this year, slightly higher than earlier estimates, before gradually moving toward the Bank of England’s target of 2% in subsequent years.
Source: https://www.bbc.com/news/articles/cg5m7mg8p59o?at_medium=RSS&at_campaign=rss