Healey sets £15bn fiscal buffer as UK growth forecasts trimmed

The Office for Budget Responsibility (OBR) has trimmed its near-term growth projections, yet the government still expects to satisfy its fiscal rules, with £15 billion of slack available at the end of the forecast period.

The main growth revisions are as follows:

• GDP in 2026 is projected at 1.2%, compared with 1.1% in March.

• The 2027 forecast has been cut to 1.0%, down from 1.6% in March.

• For 2028, growth remains at 1.6%, matching the March figure.

• 2029 is seen at 1.8%, up from 1.5% in March.

• 2030 is expected to come in at 1.7%, against 1.5% previously.

• 2031 is pencilled in at 1.6%.

The steep downgrade to 2027 stands out, with growth now placed at just 1.0%. The later-year revisions are more encouraging, though that is a standard move in such forecasts.

On the fiscal side, the debt outlook has worsened:

• In 2026/27, public sector net financial liabilities are put at 83.2% of GDP, up from 82.6% previously.

• 2027/28 is forecast at 83.8%, versus 82.9% before.

• 2028/29 comes in at 83.8%, compared with 82.9% earlier.

• 2029/30 is projected at 83.1%, against 82.2% previously.

• 2030/31 is seen at 82.3%, up from 81.1%.

• 2031/32 stands at 81.7%.

The OBR additionally forecasts a budget deficit of 4.2% of GDP this year, narrowing to 3.4% the following year. Public sector net borrowing is put at 1.8% of GDP in 2030/31, compared with 1.6% in the March projection.

According to Healey, the government will spend an extra £14 billion on debt interest this year, illustrating the toll taken by higher global borrowing costs.

Healey excluded across-the-board tax increases and severe reductions in public services, while repeating a commitment to the government's fiscal rules. Part of the leftover buffer will be used to cushion the effects of the Iran war.

The £15 billion buffer sits well below the £23.6 billion projected in March, though it is broadly in line with the £15 billion that economists expected in a Reuters poll.

Financial markets have stayed fairly calm, with the 10-year UK gilt yield sliding further to 5.34%, 1.4 basis points lower on the day.

The broader picture is that Healey has managed to hold onto some fiscal room for manoeuvre despite a considerably tougher backdrop. Still, £15 billion is hardly a hefty cushion for an economy dealing with weak growth, high debt-servicing costs and significant geopolitical uncertainty.

Bond investors are likely to draw some comfort from the government's fiscal discipline pledge, but the reduction in the 2027 growth forecast is a reminder that the UK has little margin for economic disappointment.

For the pound, the budget looks broadly neutral at this stage. Nothing in the numbers looks likely to trigger a sharp selloff, but neither does the package offer any meaningful improvement to the UK's growth prospects. Sterling was last 16 pips lower at 1.3284 on the day, barely changed since the budget headlines emerged.