The Office for Budget Responsibility (OBR) is set to downgrade growth forecasts at the Budget this week for every year of the forecast period amid revisions to trend productivity projections.
Sky News reports that the OBR is expected to cut its growth predictions, which have been more optimistic than those published by City forecasters, in its fiscal report released alongside the Budget.
A sustained period of lower than expected growth will be a damaging blow to Labour’s central mission to boost growth across the UK.
For 2026, the OBR had previously forecast growth to be 1.9 per cent whereas top City forecasters have been less optimistic, with projections ranging between 0.9 per cent and 1.4 per cent, according to a survey of City analyst notes compiled by the Treasury.
The Bank of England has projected GDP growth to hit 1.2 per cent next year.
The OBR’s downgrade to its productivity trend forecasts of 1 per cent is expected to lead to downgrades across the five-year period.
Those forecasts could be cut by as much as 0.3 percentage points, it has previously been reported.
OBR to give Labour lower marks on growth mission
A bleaker outlook for the UK economy would reflect the pressures facing public finances ahead of the Budget, with Chancellor Rachel Reeves expected to raise more than £30bn in taxes to build a greater headroom and plug a fiscal hole.
Neil Shearing, group chief economist at Capital Economics, said there was “no coherent, fully-fleshed out strategy for lifting long-term growth”, with the UK suffering from the Labour government being “light on the politically difficult trade-offs required to make [reforms] stick”.
“Ministers have ignored the uncomfortable truth that in an economy already operating at full capacity, higher investment requires someone, somewhere, to consume less,” Shearing said.
“Either private households or the state – and more likely both – will need to tighten their belts.
“That is how the additional savings needed to finance higher investment are created. Borrowing from overseas would simply bloat an already large current account deficit and is not a sustainable alternative.”
Hetal Mehta, chief economist at St. James’s Place, said “GDP growth has been lacklustre” while other City economists have also warned the government against raising taxes too high, with the burden already breaching post-war peaks.
Bond traders watching
Bond traders are also nervous about the upcoming Budget amid suggestions tax rises may not come until the final years of forecasts, allowing borrowing to be higher in the short term.
Evangelia Gkeka, senior analyst for Fixed Income Strategies at Morningstar, said bringing spending under control would bring a “better long-term solution” in the eyes of investors in bond markets.
Andrew Wishart, UK economist at Berenberg Bank, said: “[A] smaller, messier, backloaded fiscal tightening risks a negative market reaction.”
Bruna Skarica, an economist at Morgan Stanley, also said that traders may doubt that tax rises would materialise if they were backloaded, according to the Financial Times, in a reference to reports that the Chancellor intends to bank on future revenues from extending the income tax threshold freeze.