UK growth upgraded to 1.3% but energy prices, rates to slow 2027 expansion

The International Monetary Fund has upgraded its forecast for British economic growth this year to 1.3%, a meaningful revision upward from the 1% it predicted just three months earlier. The revision arrives as Chancellor John Healey prepares his first Budget under Prime Minister Andy Burnham, due to be unveiled on October 28th. The timing matters: the IMF's assessment will shape how financial markets view the government's spending and tax plans at a moment when borrowing costs have already begun to rise.

The upgrade reflects a broader global pattern. Economies worldwide have absorbed the economic shock from the US-Iran conflict more effectively than initially feared, the IMF said, though it cautioned that the full fallout from the conflict remains genuinely uncertain. For Britain specifically, the stronger near-term outlook positions the UK as the second-fastest growing economy in the G7, matched only by Germany. Yet this brightness is temporary. The IMF projects growth will decelerate to 1.2% in 2027 as higher energy prices and rising interest rates begin to constrain both household spending and business investment.

What distinguishes the IMF's assessment, however, is its praise for how Britain is managing its debt. Silvana Tenreyro, the IMF's chief economist, told the BBC that the UK now leads the G7 in its debt consolidation efforts. The organisation projects that Britain will reduce its annual borrowing by nearly four percentage points of GDP between 2025 and 2031—a far steeper reduction than most other major economies, many of which are actually increasing their deficits over the same period. By 2031, the UK is on track to have both the lowest annual borrowing in the G7 and the longest maturity of debt, a position that locks in lower interest rates for years to come. When asked whether the IMF was pushing the UK to cut borrowing, Tenreyro said the country had already begun the process and should "stay the course."

This international validation comes at a politically delicate moment. Healey faces pressure to find roughly £35 billion in his Budget to avoid cuts to public services while meeting defence commitments. The Resolution Foundation, a think tank focused on living standards, called on the chancellor to "make repairs" to the public finances but also to provide targeted support for households struggling to heat their homes through the winter ahead. The foundation framed the challenge starkly: the need to bring down borrowing must be paired with fresh cost of living support.

Inflation remains a persistent headwind. The IMF expects inflation to average 3.3% this year and remain above the Bank of England's 2% target in 2027 at 2.8%. The Bank itself has predicted inflation could spike above 4% at the start of next year, making interest rate rises more likely. Maike Currie, head of personal finance at Pension Bee, said the IMF's upgraded forecast "does give the chancellor a little bit of breathing space," but cautioned that it does not mean families are actually feeling better off yet. The improvement in the numbers, she suggested, is not a game-changer for household finances.

Healey acknowledged that conflicts in the Middle East and Europe are "hitting people in the UK and around the world," but stressed that "Britain's economy is showing strong international resilience." He has signalled the government will seek to "provide some breathing space" for households in the Budget. Andrew Griffith, the Conservative shadow chancellor, warned that if Healey "reaches for more tax rises," he would be "choosing slower growth and working people will pay for it." The Budget announcement on October 28th will test whether the chancellor can square the circle: maintaining the debt consolidation the IMF has praised while providing the support households need as inflation and interest rates bite.