The chancellor could face a £35 billion financial challenge
The UK economy is expected to grow at a slower rate in 2027 amid rising energy prices and higher interest rates.
The International Monetary Fund (IMF) has upgraded its UK growth forecast to 1.3%, up from its July 2026 prediction of 1%.
However, the IMF expects growth to ease to 1.2% in 2027 as higher costs squeeze household spending and business investment.
The latest forecasts come amid continued uncertainty surrounding the economic impact of the US-Iran war and rising energy prices.
The IMF said the global economy had shown resilience despite the conflict, with investment in artificial intelligence also helping support economic activity.
The UK is expected to record the joint second-fastest economic growth among G7 countries in 2026, alongside Germany.
However, inflation remains a concern, with the IMF forecasting that UK inflation will average 3.3% in 2026 before easing to 2.8% in 2027.
Higher energy costs could continue affecting households and businesses, potentially limiting spending and investment as the economy faces further challenges.
Chancellor John Healey said the government would look to provide households with some financial breathing space in the upcoming Budget.
The government’s tax and spending plans are due to be announced on October 28, with pressure mounting over borrowing costs and the need to maintain confidence in the UK’s public finances.
The IMF has highlighted the UK’s progress towards stabilising national debt, placing it among the few major economies expected to achieve this.
It also projects that the UK will have the lowest annual government borrowing among G7 countries in 2031.
IMF chief economist Silvana Tenreyro said the UK had already begun managing its debt and should continue with its current approach.
However, former Bank of England deputy governor Sir Howard Davies warned that the country’s growth outlook remained relatively weak despite the improved forecast.
He described the UK’s position as a slow race, suggesting its performance looked stronger partly because other economies were facing greater difficulties.
Davies also warned that rising US government debt could put pressure on interest rates internationally, increasing borrowing costs for the UK.
The upcoming Budget is expected to play a significant role in determining the government’s approach to taxation, public spending and economic stability.
Economists have suggested that the chancellor could face a £35 billion financial challenge if he wants to avoid public spending cuts while meeting defence commitments.
The Resolution Foundation has called for measures to strengthen public finances while providing targeted support to households struggling with heating costs.
Meanwhile, Conservative shadow chancellor Andrew Griffith warned that further tax increases could weaken economic growth and place additional pressure on working people.
Although the upgraded forecast offers some encouragement, the UK economy continues to face uncertainty as energy prices, inflation and borrowing costs shape the outlook for 2027.
