Chancellor John Healey is preparing to deliver his first Budget next Wednesday against an uncertain economic backdrop, with a challenging remit to balance the country's finances while supporting Britons facing cost-of-living pressures. He is expected to reveal plans for a number of cost-of-living measures, alongside moves to increase taxes for banks and gambling firms.
The Budget comes on the back of another year of economic upheaval, particularly linked to the ongoing conflict in the Middle East. Global economic data, from bodies including the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), has suggested that the UK has been relatively resilient so far but could see weaker growth and higher inflation looking forward.
The Office for National Statistics (ONS) revealed a raft of data in recent days shedding light on the economic challenge facing the Chancellor.
Economic Growth and Inflation Outlook
On Wednesday, the UK's fiscal watchdog – the Office for Budget Responsibility (OBR) – will unveil its latest economic forecasts alongside the Budget. It is expected to upgrade growth for the current year compared with previous projections but is likely to indicate growth might slow in 2027, having previously suggested it would improve next year.
Earlier this month, the IMF said the UK economy is set to grow 1.3% this year, up from a previous 1% forecast. However, it reduced its prediction for 2027 to 1.2% from 1.3%. It indicated that the adoption of artificial intelligence (AI) and other technology spending has helped support growth so far this year despite the Middle East conflict.
Data published last week by the ONS showed that UK gross domestic product (GDP) rose by 0.1% in August. Monthly growth figures have surpassed expectations nearly every month so far this year, with economists suggesting the economy has not been impacted as severely by the Iran war as many feared. Nevertheless, the latest figures pointed towards a slowdown in activity after 0.4% rises in the two previous months. Fresh flash PMI economic data published on Friday pointed to another strong performance in October, with the strongest business activity since February, amid a boost from AI.
Inflation and Government Borrowing
ONS data published on Wednesday showed that UK Consumer Prices Index (CPI) inflation lifted to an 11-month-high of 3.5% in September, slightly ahead of predictions. The increase was driven by a 30% jump in motor fuel prices, which pushed higher because of further fighting in the Middle East and disruption to oil supplies.
Inflation is expected to keep ticking higher in the coming months, with the Bank of England forecasting that inflation will peak at slightly above 4% at the start of next year. The continued rise will be linked to higher household energy costs, which increased in October and are set to surge by around 16% from the start of January. The Government has already said it will remove VAT from household electricity bills until March next year in an effort to keep down the cost of living. However, the Chancellor is facing pressure to announce further policy measures next week aimed at reducing the cost of living for poorer households.
One of the Treasury's key challenges will be financing cost-of-living measures amid a backdrop of rising borrowing costs. The yield on long-term gilts – government bonds – hit their highest level on record last month and have remained elevated. ONS figures released this week showed that government borrowing rose above forecasts to £24.5 billion in September after being impacted by high debt interest costs. Central government debt interest costs were £10.9 billion for September, up £1.6 billion against the same month last year, and marking the largest September figure on record.
Economists at EY have widely predicted that the Government's fiscal headroom is likely to have roughly halved to £11 billion, indicating that higher borrowing costs have reduced the Treasury's leeway to meet fiscal rules. It therefore means that spending plans will need to be directly offset by either tax measures to bring in more revenues or further borrowing. The public finance figures showed that the Government has made some progress in reducing the proportion of government debt compared with GDP, with this declining to 94% from 94.7%.
Labour Market and Consumer Spending
Data from earlier this week showed bright spots in the UK's labour market, with the jobless rate dropping to its lowest level in more than a year. The rate of UK unemployment fell to 4.7% in the three months to August, from 4.9% in the three months to July, the ONS said. However, the number of vacancies available to workers has seen its biggest decline since the start of the year as job opportunities dried up.
The IMF cut its unemployment rate projection for this year from 5.6% to 5.3% in its latest forecasts after the UK's labour market was more resilient than expected over the year. The Labour Government has stressed that getting more young people into work is a key priority amid concerns over the high levels of people not in employment, education or training, who are dubbed Neets. An estimated 981,000 people between 16 and 24 were considered Neets in the quarter to June, according to most recent data from the ONS.
The uncertain global economic backdrop has led to some fragility in consumer confidence. A survey from S&P Global earlier this month indicated that UK consumer sentiment this month dropped to the lowest since July 2023 amid concerns over rising inflation and potential interest rate hikes. ONS data also showed that UK retail sales volumes declined last month as warmer weather dragged on demand for autumn and winter clothing. Sales volumes slipped by 0.4%, more than expected, amid pressure on clothing and food retailers. It indicated another subdued month for consumer spending, with suggestions from some analysts that shoppers are being cautious ahead of the Budget.
