Modest UK growth rebound won’t ease chancellor’s autumn budget challenge

The UK economy may have been more resilient than expected in recent months, but that won't stop the Office for Budget Responsibility from downgrading its economic assessment in the autumn, blowing a £25bn hole in the budget relative to the Spring Statement in March.

The UK economy grew by 0.1% in August, offsetting a fall in July, driven partly by a volatile couple of months for manufacturing. It keeps the UK economy on track to grow by roughly 0.2% in the third quarter overall.

We’re always reticent to read too much into these volatile monthly figures, which have been even more bumpy over recent months, given the frontloading ahead of tariffs and stamp duty changes earlier in the year. Generally, though, the economy is performing a little better than expected a few months ago, helped by upward revisions to growth towards the end of last year. That helped boost our annual GDP forecast to 1.5% for this year.

Some of that strength can be traced back to the material rise in government spending we've seen this year. Real-terms departmental budgets are rising by 4%, having risen by almost 3% in the last fiscal year. Output in government-related sectors has been growing more quickly in annual terms than the wider economy. The effects are even more apparent in the jobs market, where rising government hiring has offset steady falls in private sector employment.

That tailwind is likely to diminish next year. In our view, the combination of downgrades to the OBR’s economic forecasts (chiefly productivity), higher gilt yields and policy U-turns leaves a £25bn a year budget hole, relative to the situation at the March Spring Statement. Despite political pressure, that likely means the government will be unable to materially deviate from its previous spending plans, which sees departmental budgets growing much less rapidly in the next fiscal year. Set that against a significant increase in taxes, and we think government policy following the Autumn Budget will pose more of a headwind to growth in 2026.

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