The Office for Budget Responsibility (OBR) raised its growth expectations for this year but painted a gloomier picture for the next four, citing lower productivity growth as the reason for the weaker outlook.

Over the coming five years, the watchdog expects a rise in public services spending, yet warns that tax increases will lead to unprecedented total tax revenue. The OBR's lowered growth forecasts are a setback for the government's objective of enhancing the UK economy and living standards.

Evidently, the OBR forecasts a 1.5% economic expansion this year, up from a previous estimate of 1%. However, it has adjusted its growth projections down to 1.4% for 2026 and 1.5% for each of the subsequent four years.

OBR Warns: Sluggish Recovery, Higher Taxes 

The OBR projected that growth would “pick up only gradually” due to ongoing global uncertainties, noting subdued confidence among UK businesses and consumers, partly in anticipation of tax increases.

In contrast, Chancellor Rachel Reeves claimed in her Budget speech that the government had surpassed growth forecasts this year and would continue to do so, emphasising ongoing efforts to enhance economic growth through infrastructure development.

Remarkably, economic growth enhances business investment, resulting in job creation and increased wages, which boosts government tax revenues and public services. However, KPMG's chief economist Yael Selfin notes that growth influences may lie beyond government control, particularly due to the unpredictable nature of new technologies.

The OBR apologised for mistakenly publishing its growth forecast prior to the chancellor's Budget presentation. Reeves found the error “deeply disappointing,” attributing the downgrade in growth to a 0.3 percentage point reduction in expected UK productivity.

Besides, the forecaster noted that expected economic recoveries after disruptions like the Covid pandemic and energy price crisis have not materialised, based on an assessment of the UK's productivity performance in a historical and international context, rather than on particular government policies.

Threshold Freeze Adds Millions

The watchdog reported that reduced productivity growth may have led to a £16bn drop in government revenues for 2029-30, but this was offset by rising inflation, wages, and VAT receipts. The main tax revenue boost in the Budget resulted from a three-year extension of the freeze on income tax thresholds starting in 2028.

Furthermore, the freeze in thresholds will generate an estimated 780,000 basic-rate, 920,000 higher-rate, and 4,000 additional-rate income taxpayers by 2029-30. The OBR projects that the tax burden will attain unprecedented levels, increasing by £26 billion by the end of the parliament in the 2029-30 financial year.

Public spending is projected to increase annually, reaching an additional £11bn by 2029-30, mainly to reverse welfare cuts and remove the two-child limit on universal credit. Consequently, the chancellor has doubled the buffer against fiscal rules to approximately £22bn.

Reeves' fiscal rules include: 

• Not borrowing to cover daily public spending by the end of the current parliament.
• Ensuring that government debt decreases as a proportion of national income by the end of this parliament.

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Reeves Underlines Fiscal Rules as OBR Revises Inflation Outlook

Governments in wealthy nations impose self-regulated rules to maintain financial market credibility. Reeves emphasises her “non-negotiable” rules to reassure markets regarding the OBR's evaluations of government policies.

Nevertheless, forecasts, considered best estimates in an uncertain environment, frequently necessitate revisions, as seen in the Budget adjustments from the Spring Statement.

Following the OBR's report, the UK bond market experienced temporary volatility, but gilt yields subsequently decreased below pre-leak levels.

At last, the OBR forecasts an inflation rate of 3.5% for this year, slightly up from the prior estimate of 3.2%, with expectations of a decline toward the Bank of England's 2% target in subsequent years. Inflation is anticipated to have peaked at 3.6% for the year ending in October.