Budget ‘papers over cracks’, say economists as UK growth forecasts downgraded

Economists have warned that plans by the Chancellor to raise the UK tax-take “papers over the cracks” in the economy, as UK growth forecasts from next year were downgraded.

The Government’s official forecaster improved its growth forecast for this year but downgraded its predictions for the next four years, while it also pointed to a worsening short-term picture for inflation and unemployment.

The financial markets were broadly positive about the Budget announcement, with government borrowing costs easing after Rachel Reeves confirmed a bigger buffer to meet her fiscal rules.

But gilt yields were shaken earlier on Wednesday after a “mistake within the OBR (Office for Budget Responsibility)” led to its economic outlook document being published early “accidentally”.

The OBR apologised, blaming a “technical error” for the release of the document, which is typically published after the Budget speech in Parliament.

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

But this was 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%.

The OBR indicated that measures from the Budget would contribute to a slight lift in economic growth next year.

It also highlighted that the tax burden on the economy would hit record levels by the end of the Labour government.

The UK’s tax-to-GDP ratio was predicted to be 36.3% of GDP this year and was 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 would 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 funds raised from taxes would be backloaded towards the end of the five-year period outlined in the Budget.

Oxford Economics’ Andrew Goodwin said the Budget “papers over the cracks but can’t hide the fiscal risks”.

He said: “The policy tightening was at the lower end of expectations, reflecting smaller revisions to forecast borrowing by the OBR.

“As the OBR’s new growth forecast is in line with the most optimistic independent forecast, we think this will store up problems for the future.

“The Budget measures won’t trigger substantial changes to our already below-consensus GDP forecasts for the UK for 2026 and 2027.

“However, we think markets will gradually lose faith, and the risk of a sudden confidence crisis remains live.”

Elsewhere, economists at Pantheon Macroeconomics said: “Despite the positive spin from the Chancellor today, the fiscal outlook remains perilous.

“Some of the fiscal savings will fail to materialise, the Government seems to lack the political power to push through measures necessary to stabilise the fiscal ship in the near-term, and we think defence spending will place further pressure on the sums.”

Meanwhile, the OBR also said UK inflation was 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 expected 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.

But Budget policies would 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.