Middle East Conflict: OBR Revises UK Economic Outlook

The Office for Budget Responsibility has lowered its growth forecast for the United Kingdom in response to rising energy costs linked to the ongoing conflict in the Middle East.

The OBR cut its 2027 growth estimate from 1.5% to 1%. It attributed this decline to the fading effect of the country's initial resilience against the war. The agency expects consumer inflation to approach 4% as the economic pressure builds.

Chancellor John Healey presented his first budget alongside the release of the OBR report. He acknowledged that the market fallout from the conflict is increasing borrowing costs. The government is now spending an additional 14 billion pounds on debt interest. To offset this, Healey announced a temporary increase in bank taxes to fund his energy support package.

The fiscal buffer for the government has also shrunk. Healey left 15 billion pounds of headroom against the main fiscal rule. This is less than the 23.6 billion pounds left by his predecessor, Rachel Reeves, in the spring. The OBR projects that borrowing will fall to approximately 2% of GDP over the medium term, though the timeline is slower than previously assumed.

Despite the downward revision for next year, the outlook for the current year remains positive. The OBR raised its 2026 growth estimate from 1.1% to 1.2%. This adjustment reflects a strong performance in the first half of the year, driven largely by investment in artificial intelligence. Britain recorded the fastest growth among G7 nations during that period.

Healey announced direct payments of 100 pounds for 20 million households to help mitigate the cost of living squeeze. This measure will cost the exchequer 2.6 billion pounds. He also plans to abolish standing charges on gas bills. The OBR warns that disposable income per person will still fall in the short term before rising modestly later in the decade.

The economic disruption stems from the US and Israeli led invasion of Iran at the end of February. Since then, oil prices have climbed from roughly 70 dollars a barrel to over 115 dollars. Gas prices have nearly tripled. The OBR noted that a sustained high energy price peak could push borrowing 17 billion pounds above its central forecast next year, while a lower price path could reduce it by 12 billion pounds.