LONDON DAILY ARCHIVE
OBR Issues Caution on UK's Economic Outlook Amid Global Trade Uncertainty
UK growth forecast cut to 1% amid potential US tariffs and rising costs of borrowing.
26 March 2025 · 23:02 UTC
The OBR warned that the UK's fiscal situation could worsen significantly if former US President Donald Trump proceeds with proposed trade tariffs of 20% on imports from various countries, which may lead to a reduction in the UK's Gross Domestic Product (GDP) by up to 1%.
Richard Hughes, chair of the OBR, highlighted that the ramifications of Trump's trade policies and rising global interest rates are substantial risks to the UK government’s finances.
The updated report coincides with Chancellor of the Exchequer Rachel Reeves's spring statement, where she is grappling with a landscape of lower growth predictions and heightened borrowing costs.
Following Reeves's announcements of cuts to welfare benefits and substantial departmental spending reductions aimed at delivering £14 billion in savings, the OBR indicated a narrowing of fiscal headroom, which could be adversely impacted by geopolitical tensions and fluctuating global borrowing rates.
The OBR's analysis suggests that, by 2029-30, the government may incur an additional £10.1 billion in debt servicing costs relative to prior forecasts, necessitating stringent economic measures.
Despite the reduced growth forecasts for the current year, the OBR raised its growth outlook for following years, attributing this change to the anticipated effects of increased investment spending.
The report noted that planning reforms could enhance the potential output of the economy, contributing an estimated 0.2% to GDP by 2029. Under Reeves's fiscal framework, two principal rules were established: balancing day-to-day government spending with revenues before the end of parliament in 2029, and ensuring a decline in the debt-to-GDP ratio in the final year of the parliamentary term.
The OBR also reported a transformation in the government’s fiscal margin, with a fall from a surplus of £9.9 billion to a deficit of £4.1 billion by 2029-30, largely due to rising debt interest payments and weaker-than-expected tax revenues.
The anticipated inflation rate for the year has been revised upward to an average of 3.2%, influenced by escalating energy and food prices, coupled with sustained wage growth, with predictions of inflation peaking at 3.7% by mid-2025 before realigning to the 2% target in 2027.
In response to the challenges, Reeves announced fiscal adjustments including further cuts to welfare spending and tightened Whitehall budgets in the latter half of the parliamentary term, alongside enhanced measures to tackle tax avoidance, aiming to restore the near £10 billion headroom by 2029.
The OBR underscored that the government’s borrowing levels from now until 2030 are forecasted to exceed previous estimates by £47.5 billion.
An impending increase in employer National Insurance contributions is expected to elevate tax receipts as a percentage of GDP from 35.3% this year to a historic high of 37.7% by 2028. Nevertheless, tax receipts this year are projected to be £7.6 billion lower than October's forecasts, mainly due to underwhelming self-assessment returns and corporation tax collections.
Economic consultancy Capital Economics characterized the Treasury's recent tightening of fiscal policy as modest, estimating a tightening of £9.7 billion, or 0.3% of GDP, by 2029-30 compared to previous plans, which only partially offsets a prior policy loosening.
The OBR is tasked with evaluating the government's economic finances and forecasts twice annually, coinciding with the government’s autumn budget and spring statement.
Despite the downgraded growth forecast, the OBR’s outlook remains comparatively optimistic relative to some other predictions, with City economists anticipating a growth rate of 0.8% in 2025; the Bank of England projects even more muted growth at just 0.7%.