The budget math this month could swing on a detail that usually sits in the weeds: how fast pay is growing. Economists calculate that if the OBR nudges up its wage-growth projections at the Oct. 28 budget, Healey's fiscal cushion could swell by as much as £9 billion, likely allowing him to avoid large tax increases or curbs on spending. That potential sweetener arrives as higher borrowing costs linked to the Iran war have otherwise darkened the outlook.
Many forecasters think the OBR's March call on earnings was on the gloomy side, especially after an inflation shock that tends to spur workers to claw back lost purchasing power. Bloomberg Economics' chief UK economist Dan Hanson argued this week that the OBR's wage view "looks too low" and is a "big upside risk to the outlook for the public finances." He added, "We think a large revision is unlikely at the upcoming budget but a modest adjustment is very possible," which "could mean Healey only has to confront a small deterioration in the public finances, alleviating pressure to announce measures to course correct the fiscal deficit."
Not all pay gauges are built the same. The OBR bases its forecast on a national-accounts measure of pay growth. The Bank of England tracks private-sector regular pay via Average Weekly Earnings data, while Bloomberg Economics models whole-economy total pay using the same AWE source. As of March, the OBR put pay growth at 3.4% for the current year, projecting it would slow to 2.4% in 2027 and fall further to 2.1% in 2028.
Ruth Gregory, Capital Economics' deputy chief UK economist, said the chancellor "could get lucky," estimating that fiscal headroom would be £8 billion larger if the OBR shifted its wage profile to mirror her firm's. According to the Institute for Fiscal Studies, a realistic scenario would boost income-tax receipts by £9 billion compared with March. Nick Ridpath, an IFS research economist, put it this way: "The OBR has been pretty pessimistic in recent years about earnings, but we would expect higher inflation to feed through to some degree to higher nominal earnings."
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A key judgment is how much the energy shock bleeds into broader inflation through wages. Like the BOE, the OBR has to assess whether workers have sufficient bargaining power in a cooler labor market to push for bigger pay packets. Deloitte UK's chief economist, Debapratim De, said: "Persistently high inflation could push up wages," noting that, alongside fiscal drag, this is one route to stronger receipts, although it hinges on incomes actually responding to prices.
Jonathan Haskel, a former BOE rate-setter newly appointed as the OBR's chair, could be pivotal. In 2023 he argued the "non-accelerating inflation rate of unemployment" is probably higher post-pandemic, implying the jobs market may be tighter than it looks and thus more prone to wage strength. With inflation expected to exceed 4% in the early part of next year, some BOE policymakers warn wage pressures may ease by less than many expect.
Healey inherits some history here: his predecessor Rachel Reeves benefited from a wage-forecast upgrade at last year's budget, which helped offset weaker productivity. This time, beyond wages, the OBR's stance on more speculative pieces such as migration and housebuilding could swing the sums, too. In March it concluded the government was complying with its fiscal rule by £23.6 billion, prior to gilt yields jumping to their highest in decades.
If the OBR edges wage growth higher, it could give Healey just enough room to avoid the harshest choices. For your wallet, the takeaway is simple: tax and spending paths flow from these forecasts, and a small change in pay assumptions can shift the outlook for government revenues without any new policy at all.
A small revision can close or open a multi-billion gap. Get the free Market Briefs daily newsletter and follow it.
