The 10 OBR Budget forecasts it’s worthwhile to learn about: What subsequent for rates of interest, inflation and home costs?

House price growth will fall next year, with real wages dropping later, the Office for Budget Responsibility (OBR) warns after the 2024 Budget.

The OBR has published its latest forecasts for tax receipts, the economy, inflation, house prices and unemployment.

‘This Budget delivers a large, sustained increase in spending, taxation, and borrowing’, the OBR said. 

In a 205-page document, the OBR said house price growth looks set to fall next year.

It claimed Reeves’ National Insurance contributions hike for employers will have a negative effect on real earnings in 2026 and 2027. 

This is Money outlines the key data and charts from the OBR’s latest forecasts, taking into account the £40billion of tax hikes in the Budget.

Tax receipts

Sweeping tax hikes were announced in the Budget, covering everything from a national insurance hike for employers, the abolition of relief from inheritance tax on pensions, VAT on private school fees and stamp duty increases on second homes. 

The OBR said: ‘These raise £36billion (just over 1 per cent of GDP) a year in additional revenue and push the tax take to a historic high of 38 per cent of GDP by 2029-30.’ 

Reeves increased National Insurance contributions for employers by 1.2 percentage points, which she said would raise £25billion. 

The OBR said: ‘The direct effect of the Budget policy on employer NICs is expected to raise £23.7billion in NICs in 2025-26 rising to £25.7billion by the end of the forecast.’

Capital gains tax is being increased, and, alongside curbing of reliefs, will bring in £2.5billion.

The OBR said: ‘Capital gains tax receipts are expected to raise £15.7billion in 2024-25, an 8.1 per cent increase from last year.

‘Receipts are expected to raise £15.7billion in 2024-25, an 8.1 per cent increase from last year. Receipts continue to increase over the forecast, reaching £31billion in 2029-30. 

‘Relative to our March forecast, before the impact of policy measures, receipts are forecast to be £2.8billion a year higher on average.’

Inheritance tax is also in the crosshairs, with the Government milking another £2billion by reducing benefits for estates and people handing down farms and shares. 

On the impact of inheritance tax changes, the OBR said: ‘Combined, the three changes raise £2.3billion by 2029-30. IHT on pension wealth accounts for £1.5billion by 2029-30.’

Property transaction tax receipts are expected to raise £14.1billion in 2024-25, representing a 10.5 per cent increase from last year. 

Reeves said stamp duty on second homes would be increased from 3 per cent to 5 per cent. 

The OBR said: ‘The policy change increasing the higher rate of stamp duty for additional dwellings raises a further £0.4 billion by 2029-30.’  

Economic forecasts

The OBR upgraded Britain’s economic growth forecasts for this year and next after the Budget, but downgraded forecasts for the following three years. 

The watchdog expects the economy to grow by 1.1 per cent this year, up from a previous forecast of 0.8 per cent.  

It forecast higher growth, of 2 per cent, in 2025, up from its March forecast of 1.9 per cent. 

However, in 2026 and towards the end of the parliament, growth looks set to be slightly weaker than forecast in March, the OBR said. 

It added: ‘As the effects of monetary policy loosening and the temporary boost to demand in this Budget fade, the output gap is expected to close over the rest of the forecast. 

‘This lowers GDP growth to around 1½ per cent in the final three years of the Executive summary Economic and fiscal outlook 8 forecast, slightly below our estimate of medium-term potential output growth of 1⅔ per cent.’

Inflation

The OBR said CPI inflation will average 2.5 per cent this year, 2.6 per cent in 2025, then 2.3 per cent in 2026, 2.1 per cent in 2027, 2.1 per cent in 2028 and 2 per cent in 2029. 

It said there was ‘significant uncertainty’ surrounding inflation, with domestic and international factors coming into play.  

The latest figures show inflation rose 1.7 per cent in the 12 months to September, the lowest rate in three-and-a-half years. The Bank of England’s inflation target is 2 per cent. 

Analysts expected inflation to fall to 1.9 per cent, but lower airfares and petrol prices meant it fell more than anticipated. 

However, costs across the services sector, which encompasses restaurants and pubs, are still growing. 

Inflation has fallen since it hit 11.1 per cent in October 2022, which was the highest rate for 40 years.

Interest rates

Interest rates are expected to fall to 3.5 per cent in the final year of the forecast, the OBR said. 

It added: ‘Market expectations for interest rates remain volatile, with expectations for Bank Rate in 2025 varying between 3.6 and 4.7 per cent and daily five-year gilt spot yields varying between 3.5 and 4.2 per cent since the March forecast.’ 

The OBR raised forecasted interest rates and gilt yields by a quarter percentage point across the forecast. 

Amid lower inflation, the Bank of England kept interest rates on hold at 5 per cent in September, but a further cut is expected at its next meeting in November. Prior to this, interest rates were held at 5.25 per cent for many months.    

House prices and mortgages

The OBR expects property price growth to stutter next year. 

It said: ‘In our central forecast, we expect house price growth to fall back slightly from 1.7 per cent in 2024 to 1.1 per cent in 2025, as the average effective mortgage rate continues to rise.’

From 2026 to the end of the forecasted period, house price growth is then expected to hover at around 2.5 per cent. Average house prices in 2028 are expected to reach £310,000. 

The OBR expects property transactions to rise from around 275,000 a quarter in 2024 to around 350,000 a quarter over the forecast.

It said: ‘Compared to our March forecast, property transactions are therefore higher in the short term but marginally lower in the medium term, reflecting our forecast for fewer net additions to the housing stock, which reduces supply.’ 

On mortgages, the OBR said: ‘Average interest rates on the stock of mortgages are expected to rise from around 3.7 per cent in 2024 to a peak of 4.5 per cent in 2027, then remain around that level until the end of the forecast.’ 

Unemployment

‘Vacancies continue to fall, wage growth has eased, while administrative measures of employment and unemployment have weakened’, the OBR said on Wednesday. 

It added: ‘The participation rate is forecast to gently decline to 62.5 per cent by 2029, driven by rising health-related inactivity, the overall ageing of the population, and the rise in employer NICs announced in this Budget.’

The increase in employer NICs announced looks set to reduce the ‘participation rate’ by 0.1 per cent from 2025-26, the OBR said. 

It expects the unemployment rate to peak at 4.3 per cent, or 1.5million people, in the third quarter of this year, before falling to4 per cent in mid-2025. In mid-2027, unemployment looks set to creep up again to 4.1 per cent, it added. 

The OBR added: ‘Employment rises by around 200,000 a year on average between 2024 and 2029, owing to population growth.’

Average earnings

The OBR forecasts ‘stronger’ nominal earnings growth of 4.7 per cent this year and 3.6 per cent next year, 1.1 and 1.6 percentage points higher respectively compared to previous forecasts. 

It said: ‘Nominal earnings growth over the first half of 2024 has fallen less than expected in our March forecast, as pay settlements have remained sticky despite falling inflation. 

‘Alongside this, Budget policies raise earnings growth by 0.2 and 0.6 percentage points respectively, in 2024 and 2025 but lower it slightly from 2026.’ 

Average earnings growth looks set to come in at around 2.2 per cent a year from 2026 onwards, it added. 

On real earnings, the OBR said: ‘We expect real earnings to grow 2.4 per cent this year and 1.2 per cent in 2025, 1.1 and 0.7 percentage points higher than in March, respectively. 

‘Real earnings then stall in 2026 and 2027 as firms rebuild margins and pass on the cost of higher employer NICs. 

‘This means we do not expect real wages to resume growing in line with productivity (around 1 per cent a year) until beyond the forecast horizon.’

Household income 

Real household disposable income (RHDI) per person looks set to grow by an average of just over 0.5 per cent a year between 2024-25 and 2029-30, the OBR said. 

This is below the average of around 1 per cent a year in the decade before the pandemic, but RHDI per person is still expected to increase by 3.5 per cent across the forecast. 

While RHDI per person is expected to increase up to 2026, its growth is then expected to ‘fall sharply’ in 2026-27 and 2027-28.

It said: ‘The slowdown is explained by five trends: the labour share of income easing back from the recent rise as firms rebuild squeezed profit margins; a substantial part of the employer NICs increase being passed onto real wages; other tax rises in the Budget; non-labour income easing back to medium-term trends; and a rising state pension age dragging on benefit payments.’     

Borrowing

In the Autumn Budget, Reeves said the Government will bring the current Budget ‘into balance’ so it doesn’t borrow to fund day-to-day spending. She said net borrowing will fall over time.

In its analysis, the OBR said borrowing is forecast to increase in nominal terms to £127.5billion, or 4.5 per cent of GDP, in 2024-25, and then fall in each year to reach £70.6billion, 2.1 per cent of GDP, in 2029-30. 

The OBR added: ‘Borrowing is forecast to be an average of £28.4billion (0.9 per cent of GDP) higher per year than expected in March, due primarily to the effect of policy measures announced in this Budget.’

It said: ‘The direct effect of Budget policy decisions increases borrowing by an average of £32.0billion a year between this year and 2028-29.’ 

Debt

Net debt as a share of GDP is expected to fall from 98.4 per cent this year to 97.1 per cent by the end of the decade, the OBR said. 

However, underlying debt as a share of GDP, excluding the Bank of England, is forecast to rise in every year of the forecast. 

Public sector net debt is forecast to fall from a more-than-sixty-year high of 98.4 per cent to 96.9 per cent next year. 

It then looks set to increase year-on-year to 97.3 per cent of GDP in 2028-29, before falling to 97.1 per cent of GDP by the forecast horizon, according to the OBR.