‘A pretty grim picture’: outlook for UK living standards slashed despite Healey’s budget

‘A pretty grim picture’: outlook for UK living standards slashed despite Healey’s budget OBR cautions about Middle East war dragging down growth and triggering a fresh cost of living crisis

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British households face a “pretty grim picture” for living standards as the war in the Middle East drags down growth and triggers a fresh cost of living crisis, the government’s independent forecaster has said.

In a report as John Healey announced his first budget, the Office for Budget Responsibility (OBR) issued a sharp downgrade for growth in 2027, household disposable incomes and the public finances despite the measures taken by the chancellor .

Although Healey sought to cushion the blow through “breathing space” policies to help households and businesses with soaring energy costs, the watchdog slashed its growth forecasts for 2027 and warned that inflation was poised to reach close to 4% as Britain’s early resilience to the war fizzles out.

While growth this year was upgraded from 1.1% to 1.2% after an unexpectedly resilient performance fuelled by AI investment, the watchdog slashed its estimate for next year from 1.5% to 1%.

Highlighting the damage from Donald Trump’s war in the Gulf, Healey said the exchequer was spending £14bn more on debt interest as the financial market fallout from the conflict pushes up borrowing costs for governments worldwide.

Against a highly uncertain global backdrop, the chancellor said he would allow a hit to his buffer against the government’s fiscal rules – while also announcing a temporary rise in tax on banks to fund his package of energy support.

He left £15bn of headroom against the main fiscal rule , which requires day-to-day spending to be matched by tax receipts in three years’ time – down from £23.6bn left by his predecessor, Rachel Reeves, in the spring.

As a consequence, the OBR said borrowing was poised to fall to about 2% of GDP in the medium term but at a slower near-term pace than previous plans.

As the energy price shock rippling out from the Middle East hits households and businesses, the OBR said consumers would face inflation of 3.5% this year, significantly higher than the 2% forecast in March.

The outlook for household disposable income in the UK was “a pretty grim picture”, David Miles of the OBR said.

“If you go back to just before Covid, and take that as your base, where we are right now - seven years later, is virtually no growth in per person real household disposable income,” he said. “That’s pretty unusual in the history of the UK.”