UK Growth Forecasts Cut From Next Year as Productivity Concerns Deepen

The United Kingdom’s growth outlook has shifted once again after the Office for Budget Responsibility updated its projections. While the OBR now expects stronger performance this year, it has downgraded its growth expectations for the following four years. The revision highlights structural challenges facing the UK economy, particularly around weaker productivity, which remains a central factor in long-term performance. This shift also presents a setback for the government, which has repeatedly placed growth at the heart of its policy agenda in an effort to raise living standards and support long-term public investment.

For 2025, the OBR now anticipates the economy will expand by 1.5 percent, compared with its earlier estimate of one percent. However, the more optimistic short-term view is tempered by weaker expectations from 2026 onward. Growth is now projected at 1.4 percent in 2026 and 1.5 percent annually for the next four years. These numbers mark a clear downward adjustment relative to previous forecasts and underscore the complex environment in which policymakers are operating.

Productivity weakness drives the downgrade

The OBR has attributed much of the downgrade to lower expectations for productivity growth. Productivity, a measure of economic output per hour worked, is one of the strongest indicators of long-term economic health. Countries that sustain high productivity growth can support rising wages, stronger investment, and more competitive industries. The UK’s persistently weak productivity figures have been a long-running concern among economists and policymakers.

In its report the OBR noted that rebounds expected after major shocks such as the Covid pandemic and the energy price crisis have not materialised to the extent previously projected. This shortfall has directly contributed to the downward revision in medium term growth. The forecaster emphasised that its decision was based on historical evidence and international comparisons rather than any specific government policy.

Higher public spending but record tax burden expected

The OBR also indicated that public spending will increase over the next five years as the government invests in essential services including welfare, education, healthcare and public infrastructure. However the rise in spending comes alongside an expected increase in the overall tax burden. According to the OBR the total tax take as a share of national income is projected to reach a record level by the end of the current parliament, reflecting both policy decisions and the long term structural pressures shaping fiscal planning.

A key element of this outlook is the government’s decision to extend the freeze on income tax thresholds for an additional three years from 2028. The freeze means that as wages rise, more people will move into higher tax brackets. The OBR estimates that by 2029 to 2030, the freeze will result in 780,000 additional basic rate taxpayers, 920,000 more higher rate taxpayers, and 4,000 more people paying the additional rate.

Government response and the politics of growth

Chancellor Rachel Reeves responded to the OBR’s projections during her Budget speech, emphasising that the government had outperformed the growth forecast for the current year and expressing confidence that the UK can exceed expectations again. She described national growth as something being built “brick by brick,” highlighting projects such as housing construction, transport investments and major infrastructure works.

Her remarks reflect the political significance of economic growth, which the government views as essential for boosting living standards and financing public services. Stronger growth translates into higher tax revenues, enabling increased spending on schools, hospitals and policing without raising the deficit. However economists caution that many growth drivers lie outside the government’s immediate control, including technological developments, global supply chain shifts and geopolitical uncertainty.

Fiscal rules and market confidence

The OBR’s report was mistakenly published early, prompting a short period of volatility in the UK bond market before gilt yields stabilised. Despite the brief disruption, the episode highlighted the sensitivity of financial markets to changes in fiscal expectations. Reeves has stressed that her fiscal rules remain non-negotiable and are designed to maintain credibility with investors. These rules include not borrowing for day-to-day spending by the end of the parliament and ensuring government debt falls as a share of national income.

The OBR also provided updated inflation expectations, with the rate projected to be 3.5 percent this year before gradually declining toward the Bank of England’s two percent target over the coming years. October’s inflation peak of 3.6 percent is now expected to represent the high point for the near term.

A cautious outlook shaped by global uncertainty

Overall, the revised forecast reflects a cautious view of the UK’s economic trajectory. Global conflicts, fragile trade conditions and muted business and consumer confidence continue to weigh on expectations. While the government insists that growth remains achievable, the OBR’s projections suggest that the road ahead may be marked by slow improvement rather than rapid expansion.