Healey promised 'breathing space' on the cost of living this morning to insulate the UK from future geopolitical shocks. Picture by Kirsty O'Connor / Treasury
Conflict in the Middle East has slashed the UK government's fiscal headroom by more than £8bn, according to the Office for Budget Responsibility (OBR).
Standing at the dispatch box today (28 October) for his maiden Budget, Chancellor John Healey said the OBR had projected the UK's fiscal headroom would stand at £15bn in 2029/30, slightly below predictions of £16bn by Capital Economics, before rising to £22bn in 2030/31.
In March, the OBR calculated the government's fiscal headroom at £23.6bn, but KPMG analysts had it fallen to as low as £12bn in September, in part a result of the Middle East conflict.
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"I have chosen to use some of the headroom established last year to absorb the impact of the Iran war, to protect the economy and to protect family budgets," Healey said.
"That is what a buffer is for. Use it when you need it. Rebuild it when you can."
The OBR also revised its projections for GDP growth this year to 1.2%, 0.1 percentage points higher than in its March forecast of 1.1%.
However, in 2027, GDP growth is expected to slow to 1%, before picking up to 1.6% in 2028, 1.8% in 2029, 1.7% in 2030 and 1.6% in 2031.
The forecaster finalised its March projection ahead of conflict in the Middle East, meaning its latest figures are the first to take the Iran shock fully into account.
The OBR projections correlate with the International Monetary Fund's (IMF) most recent World Economic Outlook published earlier this month, in which it upgraded UK growth projections for 2026 to 1.3%, up from 1% in July.
However, it warned higher energy prices and long-term interest rates would weigh on consumption and investment, downgrading its 2027 projection to 1.2% from 1.3% at its last forecast.
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The Organisation for Economic Co-operation and Development (OECD) similarly boosted its projections for UK economic growth in 2026 in September to 1.1% but cut growth projections for 2027 with headwinds building.
"Yes, there are real challenges ahead, but Britain has beaten the forecasts this year with the action I am taking today. I believe Britain can beat the forecasts again," Healey said.
Notably, however, the chancellor deferred outlining plans to meet NATO defence spending commitments to the Spending Review next year, although he said the government plans to keep its commitment to spend 3.5% of GDP on defence by 2035, with a target of 3% by 2030.
Inflation and borrowing
Elsewhere, the UK's inflation path is expected to deteriorate further, with the OBR forecasting it to peak at 3.8% in Q1 2027 before gradually falling once again, although the outlook remains sensitive to wholesale oil and gas prices.
Despite this, the economic effect on the UK is expected to be less acute than in 2022, the OBR said.
On public sector net borrowing, Healey said the government had cut borrowing last year to its lowest level in six years, from 5.1% to 4.4% of GDP, and he would "continue that work".
The OBR forecast borrowing to fall to 4.2% of GDP in 2026, 3.4% in 2027, 2.9% in 2028/29, 2.1% in 2029/30 and 1.8% in 2030/31 and 2031/32.
He also presented the OBR's public sector net financial liabilities projections of 83.2% in 2026, rising to 83.8% in 2027 and 2028/29, before falling to 83.1% in 2029/30, 82.3% in 2030/31 and 81.7% in 2031/32.
However, public sector net debt is set to peak around 97% of GDP in 2028/29, before falling slightly to 96% by 2031/32.
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Healey said: "It is because of our Labour plans that the IMF has said the UK now stands out as a country where, 'action to reduce debt and deficit has been taken decisively'."
The IMF projected the UK's deficit will be the lowest in the G7 by 2029, he added.
In its Budget preview, Capital Economics predicted the chancellor would opt for a "compromise" Budget with limited implications for the economy and the markets.
It warned that this merely "delays the difficult decisions" and is likely to set up another round of spending and tax rises in the Spending Review and Budget in 2027.
