Britain’s economy has taken a multibillion-pound hit as the war in the Middle East drags down growth and triggers a fresh cost of living crisis, according to the government’s independent forecaster.
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war → take → forecaster
In a report as John Healey announced his first budget, the Office for Budget Responsibility (OBR) issued a sharp downgrade for growth, living standards and the public finances despite the measures taken by the chancellor.
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Office → announce → chancellor
Although Healey sought to cushion the blow through “breathing space” policies to help households and businesses with soaring energy costs, the watchdog slashed its growth forecasts for 2027 and warned that inflation was poised to reach close to 4% as Britain’s early resilience to the war fizzles out.
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resilience → seek → war
While growth this year was upgraded from 1.1% to 1.2% after an unexpectedly resilient performance fuelled by AI investment, the watchdog slashed its estimate for next year from 1.6% to 1%.
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watchdog → upgrade → %
Highlighting the damage from Donald Trump’s war in the Gulf, Healey said the exchequer was spending £14bn more on debt interest as the financial market fallout from the conflict pushes up borrowing costs for governments worldwide.
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fallout → highlight → governments
Against a highly uncertain global backdrop, the chancellor said he would allow a hit to his buffer against the government’s fiscal rules – while also announcing a temporary rise in tax on banks to fund his package of energy support.
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he → say → support
He left £15bn of headroom against the main fiscal rule, which requires day-to-day spending to be matched by tax receipts in three years’ time – down from £23.6bn left by his predecessor, Rachel Reeves, in the spring.
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which → leave → spring
As a consequence, the OBR said borrowing was poised to fall to about 2% of GDP in the medium term but at a slower near-term pace than previous plans.
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borrowing → say → plans
As the energy price shock rippling out from the Middle East hits households and businesses, the OBR said consumers would face inflation of 3.5% this year, significantly higher than the 2% forecast in March.
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consumers → ripple → March
Healey made helping families with the cost of living a core focus of his first budget, including £100 in blanket payments for 20 million households at a cost to the exchequer of £2.6bn and a plan to abolish standing charges on gas bills.
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helping → make → bills
Despite the measures, the OBR warned that households would come under sustained pressure, with per-person disposable incomes taking account of inflation expected to fall in the short-term before rising modestly before the end of the current parliament.
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households → warn → parliament
Setting the stage for a tough election run-up for Labour, the watchdog said income levels would only be about 2% above pre-pandemic levels by the start of the 2030s.
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levels → set → 2030s
Britain’s economy had shown more resilience than had been expected at the start of the Iran war, after recording the strongest rate of growth in the G7 in the first half of 2026.
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economy → show → 2026
Official figures suggested a strong expansion in AI-related business activity as one factor behind the surprise rise.
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figures → suggest → rise
Healey sought to use his budget to harness the power of the technology to boost growth in future while also safeguarding the country against the risk of cyber-attacks amid the accelerating global AI race.
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Healey → seek → race
Although saying he would never be complacent, Healey said there were “signs of resilience” in the economy as he highlighted that the Bank of England and International Monetary Fund had issued upgraded growth upgrades for the UK within recent months.
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Bank → say → months
“There are real challenges ahead but Britain has beaten the forecasts this year, and with the action I am taking today I believe Britain can beat the forecasts again,” he said.
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he → be → forecasts
However, the economy is coming under mounting pressure from the energy price shock triggered by the war.
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economy → come → war
Since the start of the US-Israeli led invasion of Iran at the end of February, which has throttled energy flows in the region, oil prices have risen from about $70 a barrel to more than $115, while gas prices have almost tripled.
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prices → lead → 115
With a tentative pause in the fighting while Donald Trump prepares for crunch midterm elections, the OBR said the outlook for the economy, households and the UK public finances remained highly uncertain.
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outlook → prepare → economy
Suggesting there were “significantly better or worse outcomes of broadly equal probability”, it said that if energy prices were to rise to a higher and more sustained peak, government borrowing could be £17bn above the central forecast next year.
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borrowing → suggest → forecast
However, a lower energy price path could reduce borrowing by £12bn.
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path → reduce → 12bn
The Aporia
