OBR expected to sound alarm on Healey’s spending pressures 

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.

Analysts have said the Office for Budget Responsibility could include an assessment of the spending pressures facing the government ahead of next year’s crucial Spending Review, where Healey will likely set out plans on how the UK will raise defence expenditure to three per cent of GDP.

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 his plans at a time where bond traders and economists are closely monitoring spending levels. 

The Treasury said it would not comment on “speculation” before the Budget.

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 was likely to raise warnings around the Spending Review as previous fiscal reports had rung the alarm on governments typically raising plans for public spending before settlements are decided between ministers. 

The City economist said he thought it was “plausible that this could happen again, potentially paving the way to a broader fiscal policy overhaul in 2027”. 

Swannell said Healey was likely to make the upcoming Budget a “relatively understated affair”, leaving big decisions around defence spending or welfare reforms to next year.

OBR’s spending alert under Hunt and Reeves

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 skepticism about spending plans ahead of crucial reviews where ministers tend to look up 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 was later answered by Rachel Reeves as she complained about a £22bn black hole in public finances just weeks after Labour was elected. 

The OBR recognised before the 2024 election that its forecasts on borrowing were subject to significant uncertainty as governments tended to boost spending packages before Spending Reviews. The OBR said this pattern was a “major cause” of forecasts on government borrowing missing the mark. The watchdog has repeatedly warned that borrowing far overshoots initial projections, as spending cuts or tax rises are often delayed by chancellors.

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, if the government struggles to identify savings.   

City AM previously reported that there were widespread concerns among economists around these projected savings being based on “ambitious” public sector productivity improvements. 

In September, OBR board member David Miles issued a warning on the path of government expenditure, saying the “public have not lowered their expectations about what the state can do for them and the level of public services in line with the reduced resources which come about as a result of productivity having been so bad”.

He warned that, by 2051, the government would have to undertake “drastic cuts in public services” with “big increases in taxes” if financial pressures continued to build up without being addressed.