Rachel Reeves must cope with lower growth and higher borrowing costs this year, as the Treasury’s independent forecaster said the global economic situation was more unpredictable and could worsen in 2025.
In a report to coincide with the chancellor’s spring statement, the Office for Budget Responsibility (OBR) said the economic outlook was “more challenging” and “more uncertain” as it forecast that growth would halve this year to 1% from its 2% prediction at the time of October’s budget.
However, the OBR’s forecasts for growth from next year until the end of the decade were upgraded after it included the impact of higher investment spending that Reeves said would result in a permanent increase in the economy’s growth rate.
The OBR said planning reforms would deliver the biggest boost to the level of potential output, adding 0.2% to gross domestic product (GDP) in 2029.
But the forecaster said the government would have to spend an extra £10.1bn to service its debt, with the government opting to cut welfare spending and restrict Whitehall budgets to restore its headroom.
Higher debt interest payments and weaker-than-expected tax receipts had reduced the headroom on day-to-day spending from a surplus of £9.9bn to a deficit of £4.1bn in 2029-30, before accounting for new policies, it said.
Inflation would also be higher this year on average than expected, increasing to 3.2% from 2.6% forecast in October. The OBR blamed higher energy and food prices and “more persistently high wage growth” for a rebound in inflation to a fresh peak of 3.7% in mid-2025, before returning to a 2% target in 2027.
Reeves said extra welfare cuts, reductions in departmental spending in the second half of the parliament and a further clampdown on tax avoidance had restored the near £10bn of headroom by 2029.
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“This remains a small margin against the risk of further shocks to interest rates, productivity, or global trade,” the OBR said, highlighting pressure to increase defence spending and trade tensions.
It warned that if Donald Trump persisted with his plan to impose 20% tariffs between the US and the rest of the world, it could reduce GDP by a peak of 1% and wipe out Reeves’s headroom by the end of the parliament.
Government borrowing between now and the end of the decade is forecast to be £47.5bn higher than it was at the time of the October budget.
The OBR said: “Debt interest spending is now expected to be broadly flat across the forecast as a share of GDP, rising very slightly in the final years.”
The consultancy Capital Economics said the Treasury’s tightening in fiscal policy amounted to £9.7bn, or 0.3% of GDP, in 2029-30 relative to previous plans. It said the change was modest and “only reverses about 30% of the 1% of GDP relative loosening in policy the chancellor put in place at last October’s budget”.
The OBR makes an assessment of the government’s finances and the outlook for the economy twice a year, coinciding with the government’s autumn budget and spring statement.
Reeves was forced to make extra savings after analysis by the OBR found only £4.8bn of savings from welfare changes rather than the £6bn expected by the work and pensions secretary, Liz Kendall.
The OBR’s forecast for growth this year remains above many other forecasts. A poll of City economists forecasts a growth rate of 0.8% in 2025, while the Bank of England is even more pessimistic, predicting the economy will grow by just 0.7%.
Source: theguardian.com
