The UK economy is projected to grow at a significantly slower pace this year than previously estimated, according to the latest forecast from the Office for Budget Responsibility (OBR).
Presenting the Spring Statement, Chancellor Rachel Reeves announced that the economy is now expected to expand by just 1% in 2025, a sharp downgrade from the 2% growth predicted in October. Reeves, who has prioritized economic growth in her agenda, expressed dissatisfaction with the revised figures. However, she highlighted that longer-term forecasts indicate improvement.
The OBR has raised growth expectations for subsequent years, forecasting economic expansion of 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029. Reeves attributed the anticipated recovery to government-led planning reforms and ambitious housebuilding targets, which the OBR estimates will contribute an additional 0.2% to GDP by the end of the current parliament and 0.4% within the next decade.
“The OBR has concluded that our reforms will drive housebuilding to a 40-year high of 305,000 homes annually by the end of the forecast period,” Reeves stated. Labour has committed to constructing 1.5 million homes by 2029-30, with the chancellor asserting that the government’s initiatives place the country “within touching distance” of that goal.
Inflation and Household Income Outlook
The OBR also revised its inflation forecast for 2024, predicting a rate of 3.2%—an increase from earlier projections. However, inflation is expected to return to the Bank of England’s 2% target by 2027.
Despite the downward economic revision, real household disposable income per person is expected to grow at an annual average of 0.5%. Stronger wage growth has led the OBR to slightly increase its estimates from October. Reeves noted that these changes mean households will be, on average, £500 per year better off under Labour’s governance compared to the previous administration.
Fiscal Rules and Budget Challenges
Heading into the Spring Statement, Reeves faced mounting pressure over how she would adhere to her self-imposed fiscal rules, which include:
- Not borrowing to fund day-to-day public spending.
- Reducing government debt as a share of national income by the end of this parliament.
In October, the OBR projected that Reeves would have £9.9 billion in fiscal headroom by 2029-30. However, shifting global economic conditions, including increased government borrowing costs, would have resulted in a £4.1 billion shortfall. Reeves claimed that recent measures, including extensive welfare reforms, have fully restored the fiscal headroom to its previous £9.9 billion level.
Global Uncertainty and Potential Economic Risks
The OBR acknowledged that global risks have intensified since October. A worst-case scenario, including economic fallout from potential US tariff policies under President Donald Trump, could nearly erase the UK’s fiscal headroom, the watchdog warned.
Paul Dales, chief UK economist at Capital Economics, cautioned that Reeves remains vulnerable to economic shocks that could force further budget tightening later this year. He suggested that non-defense spending cuts have limits and that sustained public borrowing increases may not be viable.
“The inevitable conclusion is that at some point, the government may have to break election promises and raise taxes for households,” Dales said.
With economic uncertainty looming, the government’s ability to navigate these challenges will be closely watched in the coming months.
