Britain’s fiscal watchdog is likely to sound the alarm on the spending pressures facing the government when it lays out its analysis of the Budget next week, economists have predicted, in what would be a significant move signalling the scale of the challenges facing the Chancellor.
John Healey is facing a crunch Spending Review next year in which he will set out a route to raise defence spending to three per cent of GDP, which could cost the government up to around £11bn more in spending each year. The OBR is expected to highlight the scale of that challenge when it assesses his fiscal plans, according to economists.
Analysts have predicted the Office for Budget Responsibility will highlight the extra dilemmas facing government expenditure that are not included in central figures around headroom, taxation or spending increases.
These could include warnings over the trajectory of defence spending, welfare and planned efficiencies by 2029, it has been suggested.
Alerts flagged by the independent body, whose forecasts at the Budget determine whether the Chancellor meets his fiscal rules, would represent a caution against the Chancellor’s plans at a time where bond traders and economists are closely monitoring spending plans.
The Treasury said it would not comment on “speculation” around ten days before the Budget.
Healey predicted to reveal ‘broader overhaul in 2027’
In current plans, spending is only set to rise by around 0.3 per cent in real terms in 2029-30, dropping from a rise of 2.6 in 2025-2026. Substantial tax rises worth dozens of billions of pounds would be needed to keep spending rising at a fast pace, researchers at Westminster think tanks have said.
ITEM Club economist Matt Swannell said that the OBR typically raises concerns at budgets held near a Spending Review.
Previous fiscal reports have issued warnings when governments raise plans for public spending shortly before settlements are decided between ministers.
Swannel said he thought it was “plausible” that this pattern could repeat itself, “potentially paving the way to a broader fiscal policy overhaul in 2027”.
Healey is widely expected to make the upcoming Budget a “relatively understated affair”, according to Swannell, leaving big decisions around defence spending or welfare reforms to next year.
OBR’s previous warning to Jeremy Hunt
Economists at the OBR have previously said that spending totals were normally “subject to significant upward revisions prior to or at the conclusion of the Spending Review process”.
The note, which was included in the fiscal report accompanying former Chancellor Jeremy Hunt’s Budget in 2024, points to the OBR’s scepticism about spending plans ahead of crucial reviews where ministers tend to look for top-ups across departmental budgets.
At the time, Hunt had planned for a large portion of public spending to fall by at least 2.3 per cent in real terms in the future, which would present “challenges” given problems across public services and aid for Ukraine.
The risk to the former government’s spending projections were later highlighted by Rachel Reeves when she complained of a £22bn black hole in public finances just weeks after Labour was elected.
Even in this year’s spring assessment of public finances, the OBR highlighted “pressures in the Spending Review period”, claiming there were difficulties surrounding special educational needs spending and defence.
“Technical efficiencies” worth nearly £17bn by 2029 across Whitehall could also make the Chancellor’s job of balancing the books more difficult, the fiscal watchdog said in March.
City AM previously reported that there were widespread concerns among economists around these projected savings being based on “ambitious” public sector productivity improvements.