OBR Cuts UK Growth Outlook to 1% as Oil Prices Spike

The Office for Budget Responsibility has cut its forecast for UK economic growth in 2027 from 1.5% to 1%, citing the impact of the Middle East war on energy costs. This sharp downgrade came on the same day Chancellor John Healey announced his first budget, a move that sought to stabilize the economy amid rising inflation and debt service costs.

The conflict has disrupted energy flows in the Gulf, driving oil prices from approximately $70 a barrel to over $115. Gas prices have nearly tripled since the US-Israeli led invasion of Iran began in late February. These price increases have triggered a new cost of living crisis, pressuring both households and businesses.

In response, Healey introduced a package of measures designed to provide breathing space for consumers. The budget includes a blanket payment of £100 for 20 million households, costing the public purse £2.6bn. He also announced plans to abolish standing charges on gas bills. To fund these initiatives, the Chancellor imposed a temporary tax increase on banks.

The financial impact of the war extends beyond energy prices. Healey stated that the government is spending £14bn more on debt interest than previously anticipated. This increase is due to higher global borrowing costs resulting from market reactions to the conflict. The Chancellor acknowledged the strain on public finances, noting that the buffer against fiscal rules has dropped to £15bn, down from the £23.6bn left by his predecessor, Rachel Reeves.

Despite the downgrades, the OBR upgraded its growth estimate for 2026 from 1.1% to 1.2%. This adjustment reflects a stronger-than-expected performance in the first half of the year, driven partly by investment in artificial intelligence. The UK recorded the highest growth rate among G7 nations during that period, a trend the Bank of England and the International Monetary Fund have also recognized with their own recent upgrades.

Healey argued that the economy shows signs of resilience, noting that Britain has beaten forecasts this year. "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 plans to leverage AI technology to boost future growth while strengthening defenses against cyber-attacks.

The OBR projects inflation will reach 3.5% this year, well above the 2% target forecast in March. Per-person disposable incomes are expected to fall in the short term before rising modestly. By the start of the 2030s, income levels will only be about 2% above pre-pandemic figures. The watchdog warned that households will face sustained pressure as the energy shock continues to ripple through the economy.

The outlook remains highly uncertain due to a tentative pause in fighting while US President Donald Trump prepares for midterm elections. The OBR indicated that outcomes could vary significantly. If energy prices remain high, government borrowing could exceed central forecasts by £17bn next year. Conversely, a lower price path could reduce borrowing by £12bn.