Budget 2026: OBR warns Healey faces £11bn shortfall as growth forecast slashed to 1%

Britain's fiscal watchdog has forecast that growth will slump and that joblessness and inflation will rise in the coming years, warning that John Healey will have to find billions of pounds more revenue between 2029 and 2032 to prevent cuts to government spending.

The Office for Budget Responsibility said the Chancellor would need an extra £11bn in his plans to stop day-to-day spending from falling by 2.6 per cent in real terms in the final three years of the fiscal forecast.

Tom Josephs, one of three senior figures at the fiscal watchdog, told City AM at a press conference that there had been a “bit of a pattern” for the government to increase near-term borrowing and delay tax rises or spending slowdowns. “Borrowing in the near term is a bit higher and that is both a consequence of higher energy prices, interest rates and the government’s policy choices,” he said.

The OBR cut its growth forecast for next year from 1.6 per cent to just one per cent, with trade disruption from the Iran war set to take a toll on activity in the next 12 months. Estimates suggest real household disposable incomes in 2030 will be only two per cent higher than before the pandemic, spelling a decade of gloom for families. Household budgets are set to be squeezed by 0.6 per cent this year and will not catch up to current levels until around 2028 and 2029.

Inflation was revised upwards, with economists saying it would average about 3.4 per cent in 2027, mostly due to higher energy prices. The unemployment rate is set to hit 5.1 per cent in 2027, up from around 4.1 per cent over the last two years, suggesting about 440,000 more people unemployed. The tax burden will also reach a historic high in the upcoming years, forecasts show.

The OBR's fiscal report determines whether the government has met crucial borrowing and debt targets, with small changes in forecasts swinging figures by billions of pounds. Its warning hinges on forecasts that oil and gas prices fall to pre-Iran war levels by 2028. It said its calculations were “uncertain” and put a 56 per cent chance on the Chancellor meeting his fiscal rules after he set his main fiscal buffer at just below £15bn.

Deutsche Bank analysts warned the real fiscal hole could amount to £40bn when extra defence spending and social care service promises after 2030 are factored in. Sanjay Raja, a Deutsche Bank economist, said: “Today’s Budget won’t be a clearing event for markets – although markets have taken today’s details in their stride, reacting positively to the details. Big spending decisions loom in the new year, with a Spending Review, another likely defence spending increase, and a potential National Social Care service likely to feature in future fiscal discussions. Put simply, there will be a near £25-40bn fiscal hole to fill in the new year. Questions around the backloaded nature of the projected fiscal consolidation will also raise concerns around the credibility of projected fiscal tightening.”

Professor David Miles, another of the OBR's three senior figures, previously warned the government of the cost of raising taxes further. At an event in September, he said “one of the great fiscal problems” and an “explanation” for the rise in debt was that the “public have not lowered their expectations about what the state can do for them and the level of public services in line with the reduced resources which come about as a result of productivity having been so bad”. He asked whether the UK could continue setting policies as it does now and concluded, “To which the answer is very likely not, it would not be alright. Getting lucky isn’t a plan.” He added that a rise in the tax burden beyond 37 per cent of GDP could lead to additional costs on incentives in growth.

Earlier this year, the OBR warned that public debt as a share of GDP could surpass 270 per cent of GDP by the mid-2070s. Miles then admitted that the outlook on public expenditure looked “depressing”.