The UK economy is projected to grow at a slightly higher rate than previously anticipated in the current year and the following year, according to the government’s official economic forecaster. During the Budget announcement, Chancellor Rachel Reeves stated that the Office for Budget Responsibility (OBR) now estimates a growth of 1.1% for this year, an increase from its earlier forecast of 0.8%. Additionally, the OBR has revised its growth prediction for 2025 to 2%, up from the March estimate of 1.9%.

However, growth expectations for 2026 and the latter part of the parliamentary term are anticipated to be somewhat lower than earlier projections made in March. The Chancellor emphasized that this Budget signifies a shift away from short-term thinking, with the OBR committing to providing a ten-year growth forecast alongside its Budget analysis. Reeves stated that every future Budget would aim to stimulate economic growth.

Despite these optimistic updates, the OBR has downgraded its growth forecasts for 2027 and 2028 to 1.5%, down from prior estimates of 1.8% and 1.7%. Inflation is also expected to remain slightly above the Bank of England’s target rate of 2% until at least 2029. Given the inherent difficulty in making long-term economic predictions, revisions are common as new data becomes available.

The initial stronger growth anticipated at the beginning of this parliamentary term, followed by a slowdown later on, suggests that overall economic performance by the end of this term may not differ significantly from earlier forecasts. Cumulatively, an increase of nearly 8.2% is expected by 2028, compared to nearly 8.5% predicted in March.

Paul Johnson, director of the Institute for Fiscal Studies, characterized these growth projections as rather disappointing. The rate of economic growth directly influences government capacity to implement policies throughout this parliamentary period. Stronger growth generally leads to increased tax revenues, enabling more spending on public services and reduction in taxes, while weaker growth necessitates budget cuts.

While Chancellor Reeves ruled out a return to austerity measures, she acknowledged that difficult decisions would still need to be made. However, she expressed confidence that Labour’s proposals would enhance the economy’s supply capacity and its potential for growth.

In terms of fiscal policy plans based on OBR projections, it is important to note that economic forecasts can be influenced by various factors such as geopolitical tensions and global market fluctuations. To stimulate investment in the UK, Reeves announced plans for a National Wealth Fund aimed at catalyzing £70 billion in investments and reforming planning regulations.

Labour has indicated that public services require an additional £40 billion in taxation and spending support. In response, there will be an increase in the National Living Wage by £0.77 per hour for employees over 21 years old, along with larger-than-expected adjustments to both National Minimum Wage and National Living Wage rates announced by ministers.