UK Watchdog Set to Cut Growth Forecasts Ahead of Budget Announcement

Reports on Monday indicated that the Office for Budget Responsibility (OBR), the UK's independent public finance watchdog, is preparing to cut its growth forecasts for the economy in 2026 and for the remaining years of the current Parliament. This development coincides with the budget announcement set to be delivered by UK Chancellor of the Exchequer Rachel Reeves on Wednesday.

1. Growth Forecasts and the Fiscal Hole

• Forecast Cuts: The OBR is expected to lower its estimates for productivity growth, which will subsequently impact overall economic growth projections.

  • Previous Forecasts (Spring): The body had previously forecast 1% growth for 2025, followed by 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029.

• Tax Hike Necessity: Reeves is expected to be compelled to raise taxes to fund a fiscal gap estimated to be between £20 and £30 billion ($26.2 – $39.3 billion).

• Causes of the Gap: Weakened growth forecasts, rising debt costs, and other economic factors revealed by the OBR report.

2. Market Performance and Challenges

• Chancellor's Challenge: Rachel Reeves is aiming to strike a difficult balance between spending to support stalled growth and demonstrating the UK's ability to meet its fiscal targets for investors.

• Currency Market: The Pound Sterling was little changed, stabilizing at $1.3095 ahead of the UK budget announcement.

• FTSE 100 Index: The index rose by 0.5%, supported by global market gains following statements by Federal Reserve member John Williams late Friday, suggesting interest rates could fall "in the near term."