Healey Budget Cuts 2027 Growth Forecast to 1% as Oil Shock Bites

Oil prices have surged past $115 a barrel, a jump from the roughly $70 mark seen before the conflict began, and the financial shock has now reached the core of Britain's economic projections.

The Office for Budget Responsibility (OBR) released a report on Wednesday that sharply lowered its expectations for the British economy. The independent watchdog cut its growth forecast for 2027 from 1.5% to 1%. This downgrade comes as the government attempts to manage the fiscal fallout from the war in the Middle East.

Chancellor John Healey announced his first budget in the same breath as the OBR's revised figures. He acknowledged that the exchequer is now spending £14bn more on debt interest. This increase stems from higher global borrowing costs triggered by the conflict in the Gulf.

The OBR also raised its inflation forecast for the current year to 3.5%, up from the 2% projected in March. Gas prices have nearly tripled since the start of the US-Israeli led invasion of Iran in late February. The agency warned that consumer prices would remain elevated, putting sustained pressure on household budgets.

Healey introduced measures to offset these costs, including a blanket payment of £100 for 20 million households. This initiative will cost the state £2.6bn. He also proposed abolishing standing charges on gas bills and implementing a temporary tax increase on banks to fund energy support.

Despite these interventions, the OBR projects that per-person disposable incomes will fall in the short term. Real income levels are expected to rise only modestly before the end of the current parliamentary term. By the start of the 2030s, income levels will sit just 2% above pre-pandemic averages.

The government's fiscal buffer has also contracted. Healey left £15bn of headroom against the main fiscal rule, down from the £23.6bn remaining from his predecessor, Rachel Reeves. The OBR notes that while borrowing will eventually fall to about 2% of GDP in the medium term, the near-term pace of reduction is slower than previously planned.

Healey argued that the economy has shown unexpected resilience, particularly in the first half of 2026 when it recorded the strongest growth rate in the G7. He attributed part of this strength to a surge in AI-related business activity. The chancellor said he would use the budget to leverage this technology for future growth while defending against cyber threats.

The OBR emphasized that the economic outlook remains highly uncertain due to a tentative pause in fighting. The agency stated that outcomes could be significantly better or worse with broadly equal probability. If energy prices peak higher and stay there, government borrowing could exceed its central forecast by £17bn next year.

Conversely, a lower path for energy prices could reduce borrowing by £12bn. Healey said there are signs of resilience, noting that both the Bank of England and the International Monetary Fund have recently issued growth upgrades for the UK. He maintained that Britain has beaten forecasts this year and aims to do so again.

The OBR's central forecast reflects a economy that is adjusting to a new reality of higher energy costs and elevated inflation. The data suggests that the initial resilience seen in the first half of the year is fading as the full cost of the conflict becomes apparent in public finances and household spending.