Inflation and unemployment forecasts hiked as tax burden to hit record – OBR

Inflation and unemployment are set to be higher than expected in 2025 and 2026, according to forecasts published early by the Office for Budget Responsibility.

It came as the UK’s official forecaster also reported that economic growth will be weaker than expected from 2026 to the end of the current Labour government, as the tax burden on the economy continues to rise.

Nevertheless, the OBR said the UK economy is set to grow by 1.5% in 2025, in an upgrade from its previous prediction of 1% from its March outlook.

However, this is set to slow to 1.4% next year. The forecaster had previously predicted a reading of 1.9% for the year.

It also downgraded growth in 2027 from 1.8% to 1.5%, in 2028 from 1.7% to 1.5%, and in 2029 from 1.8% to 1.5%.

Meanwhile, the OBR said UK inflation is set to be 3.5% for this year, up from a previous projection of 3.2%.

It also increased its inflation prediction for next year to 2.5% from 2.1%, although it still expects this to slow to the 2% target level by 2027.

The Bank of England is widely expected to cut interest rates from 4% next month as part of efforts to bring inflation back towards target levels.

OBR data shows that budget policies will reduce inflation by 0.4 percentage points next year, partly through the freeze in rail fares and temporary extension of the fuel duty freeze.

However, budget policies will contribute a 0.1 percentage point uplift to inflation in the following two years, due to the end of the fuel duty freeze and the new charge for electric vehicles.

The OBR also highlighted that the tax burden on the economy will hit record levels by the end of the Labour government.

The UK’s tax-to-GDP ration is predicted to be 36.3% of GDP this year and is on track to strike a record high of 38.3% of GDP by 2030-31.

Documents showed that the Budget “raises taxes by amounts rising to £26 billion in 2029-30, through freezing personal tax thresholds and a host of smaller measures”.

The freeze in tax thresholds will result in 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers in 2029/30, bringing in about £8 billion for the Exchequer.

The Chancellor said the OBR will now only publish forecasts once a year alongside each autumn Budget. It currently also releases forecasts in the spring.

On Wednesday, Rachel Reeves said it was also “deeply disappointing” that the OBR published its forecasts documents ahead of her Budget speech.

The OBR is expected to publish its forecasts following the end of the Chancellor’s speech to Parliament.

The OBR apologised, blaming a “technical error”.