Spring Forecast brings lower borrowing but higher unemployment, while war in the Middle East has scuppered the sunnier cost of living outlook - Resolution Foundation

The Office for Budget Responsibility's (OBR) latest economic outlook has delivered a mixed picture for the Chancellor and the country. The borrowing forecast has improved, but with unemployment higher and the brand new forecast for lower inflation and interest rates already out of date, bold policy action cannot wait until the Autumn Budget, the Resolution Foundation said today (Tuesday) in response to the Spring Forecast.

After the feverish and often counter-productive speculation that surrounded the three fiscal events last year, Spring Forecast 2026 has been a low-key affair with the Chancellor keeping her word and delivering no new policy today.

However, policy decisions already announced added a not insignificant £5.7 billion to borrowing in 2029-30. The policy in today's Spring Forecast had a slightly bigger effect on borrowing in the final year than typical fiscal events have since 2010.

There was little overall change in the economic and fiscal outlook. The main economic changes were a downgrade to growth in 2026 – which, at 1.1 per cent, leaves the UK ranking third among G7 economies behind the US and Canada – and a worrying increase in unemployment, which is now forecast to hit 5 ⅓ per cent in 2026, slightly surpassing the pandemic unemployment peak.

There was good news on inflation which is now forecast to return to its 2 per cent target at the end of this year. But the escalating conflict in the Middle East has now triggered a sharp rise in oil and gas prices which could cause living costs to start rising more quickly again. If sustained, these rises could add over £500 to the typical household energy bill in the summer and roughly a percentage point to inflation – bringing another unwelcome cost of living shock to families.

The projected fall in net migration – by around 60,000 a year on average – will be claimed as a political win for the Government. But it's entirely driven by more British people leaving the UK, rather than fewer foreign nationals arriving.

Even the better news on borrowing looks dated. The fall in medium-term interest rates since the Autumn Budget has delivered the Chancellor a £2.6 billion fall in borrowing in 2029-30 in today's forecast. But more recently, the increase in interest rate expectations between last Friday and when the Chancellor delivered her speech, would add around £4 billion of higher interest costs if sustained.

Stepping back, at the mid-February moment when the forecasts were finalised, the Chancellor's headroom against both of her fiscal rules had increased. Headroom against her binding current balance rule was up by £1.9 billion to £23.6 billion, while headroom against the rule of falling public sector net financial liabilities has increased to £27.1 billion.

And while there is merit in having a low-key Spring Forecast given headwinds from high uncertainty, there are still urgent policy questions that the Chancellor will need to address before the Autumn Budget.

First, immediate action is needed to address the UK's growing youth unemployment crisis. The Chancellor missed the opportunity today to expand the Jobs Guarantee or set out a more cautious approach to youth minimum wage setting that could help get employers hiring.

Second, the Government needs to be far bolder on growth – from delivering planning reforms and investing to boost housebuilding in our major cities to pursuing closer trade relations with the EU.

Third, although the path of the conflict in the Middle East is very uncertain, yet another rise in energy prices adds to the case for the Government to support families struggling with the cost of living.

Finally, these forecasts are predicated on the Government's delivering tough tax and spending plans.

These plans imply real-terms public services spending growth of just 0.3 per cent at the end of this Parliament (2029-30), well below the annual increases of around 3 per cent in 2025-26 and 2026-27. In cash terms, there are £43 billion of tax rises a year still to deliver by 2029-30 (over three-fifths of the total this Parliament). And the Prime Minister's stated aim of raising defence spending to 3 per cent of GDP by the end of this Parliament remains conspicuously unfunded. These decisions cannot be put off indefinitely and, if anything, will get harder as the next election approaches.

Ruth Curtice, Chief Executive of the Resolution Foundation, said:

“The Chancellor may have succeeded in delivering a statement free from news today, but with growth weak, unemployment rising, and the risk of further energy price shocks, the UK's economic woes demand bolder and swifter action.

“The prospect of higher unemployment is particularly concerning, and the Chancellor missed the opportunity to tackle this head on by expanding the Jobs Guarantee. The close to one million young people who are not in education, employment or training across Britain cannot afford to wait much longer for help.

“The best news from today's Spring Forecast was an outlook for lower inflation and interest rates, but sadly both already look out of date before the ink is dry on the OBR forecast. If overnight increases to oil and gas prices are sustained, we could see inflation back at three per cent by the summer with typical energy bills £500 higher.

“The absence of policy decisions today can't hide the fact that tough decisions lie ahead. Events in the Middle East have made support for families struggling with the cost of living more urgent. Looking further ahead, the Government still faces the prospect of going into the next election with major tax rises and a fresh squeeze on public services funding.”