OBR October 2026 forecast: what it means for small firms

The Office for Budget Responsibility (OBR) published its October 2026 Economic and fiscal outlook alongside the Budget on 28 October. It expects growth of around 1% in 2027, inflation near 3½% and borrowing that falls to 1.8% of GDP by 2030-31. For small firms the main messages are higher prices, slower growth, higher interest rates than the OBR assumed in March, and thin headroom for the Chancellor.

The economy forecast

The OBR says the main reason for the weaker outlook is a spike in energy prices since March, linked to the conflict in the Middle East, together with higher interest rates. Its central forecast uses market energy prices from mid-August, and it warns that outcomes are uncertain in both directions.

What the OBR says about pay and prices

The OBR expects limited second-round effects of energy prices on wages. As a result it forecasts no real earnings growth in 2027. Real household disposable income per person is forecast to fall by 0.4% on average across 2026 and 2027. Real wage growth recovers to around ½% a year by 2030.

It also says firms are expected to rebuild profit margins as energy prices fall back. Frozen income tax thresholds combined with higher nominal earnings growth pull more income into tax, which the OBR treats as an important feature of the forecast.

Borrowing, debt and the fiscal rules

The OBR forecasts public sector net borrowing of 4.4% of GDP in 2025-26, 4.2% (£133 billion) in 2026-27 and 1.8% (£67 billion) in 2030-31. The Budget document says the OBR forecasts debt interest costs averaging about £14 billion a year more than in March, which more than accounts for the rise in borrowing since then.

The OBR calls these margins very small compared with the risk around any medium-term forecast. It says the average revision to pre-measures borrowing in the third year of the forecast has been £18 billion since the pandemic.

The Budget’s own reading

The Budget document says the OBR has confirmed that the government is meeting its stability and investment rules, with a buffer of £15 billion against the stability rule and £24 billion against the investment rule. It says borrowing falls to 1.8% of GDP and debt is lower at the end of the forecast than at the start. The government has used some headroom to absorb the effect of the conflict in the Middle East.

What it means for small firms

• Costs. Inflation near 3½% and a National Living Wage rise to £13.21 raise operating costs through 2027. Review prices and contracts that lack inflation clauses.
• Borrowing. The OBR assumes Bank Rate of just over 4¼% by mid-2027. Clients with variable-rate debt should test their cash flow against that path.
• Cash flow. Slow real income growth can squeeze customer spending. The OBR warns of both better and worse outcomes with similar probability.
• Tax. Frozen thresholds mean tax bills rise as profits and wages grow, even where rates are unchanged.
• Policy risk. With a £15 billion margin and a 56% probability of meeting the mandate, the OBR says the position is sensitive to shocks.

For the policy side, see our Budget 2026 summary and our post on payroll changes for 2027-28.

Frequently asked questions

What growth does the OBR forecast for 2027?

Around 1%, about half a percentage point lower than its March forecast. It expects around 1¼% in 2026.

What inflation does the OBR forecast?

CPI inflation of about 3½% in 2027, peaking near 3¾% in early 2027 and falling to 2% in 2028.

How much headroom does the Chancellor have?

The government meets its fiscal mandate by £15 billion in 2029-30 and its supplementary target by £24 billion. The probability of meeting the mandate is 56%.

When does borrowing fall below 2% of GDP?

The OBR forecasts 1.8% of GDP, £67 billion, in 2030-31.