John Healey is preparing to announce cost-of-living measures and tax rises on banks and gambling firms on Wednesday, but faces headwinds from a mixed economic picture. The International Monetary Fund upgraded its growth forecast for 2026 to 1.3%, up from 1%, but cut its 2027 prediction to 1.2% from 1.3%. The Office for Budget Responsibility is expected to upgrade growth for the current year but signal a slowdown next year.
Recent economic data has been stronger than anticipated. The Office for National Statistics reported that UK gross domestic product rose by 0.1% in August, and monthly growth figures have surpassed expectations nearly every month this year. Fresh purchasing managers' index data published on Friday pointed to the strongest business activity since February, boosted by artificial intelligence and technology spending. This resilience surprised economists who had feared the Middle East conflict would hit harder. However, activity slowed after 0.4% rises in the two previous months, suggesting momentum may not be sustained.
Inflation remains a significant concern. Consumer Prices Index inflation reached 3.5% in September, an 11-month high, driven partly by a 30% jump in motor fuel prices linked to Middle East disruption. The Bank of England forecasts inflation will peak at slightly above 4% at the start of next year, with household energy costs set to surge by around 16% from January. Consumer confidence has dropped to its lowest level since July 2023 amid concerns over rising inflation, and retail sales volumes fell by 0.4% last month as shoppers grew cautious.
The Chancellor faces severe financial constraints. Government borrowing rose to £24.5 billion in September, above forecasts, driven by record central government debt interest costs of £10.9 billion. Economists at EY predict fiscal headroom has roughly halved to £11 billion, meaning spending plans must be offset by tax rises or further borrowing. The yield on long-term government bonds hit record levels last month and has remained elevated, reflecting rising borrowing costs.
Labour market resilience offers some bright spot. The unemployment rate fell to 4.7% in the three months to August, from 4.9%, marking its lowest level in more than a year. However, job vacancies saw their biggest decline since the start of the year, and an estimated 981,000 people aged 16 to 24 remain not in employment, education or training. The Government has stressed that getting young people into work is a key priority.
For UK savers, borrowers and businesses, the combination of rising inflation and higher borrowing costs will squeeze living standards and investment returns, whilst constrained government finances limit the scope for widespread support measures.