The UK economy is forecast to grow 1.3% in 2026, up from an earlier IMF prediction of 1%, before slowing to 1.2% in 2027 as higher energy prices and interest rates squeeze household spending and business investment, according to the International Monetary Fund's latest World Economic Outlook.

The upgrade reflects global economic resilience to the energy price shock triggered by the US-Iran war, though the IMF warns the conflict's economic fallout remains "highly uncertain". The revised forecast places the UK second-fastest growing economy in the G7 alongside Germany.

Chancellor John Healey said the government would offer "breathing space" for households ahead of budget announcements on 28 October, which will set Andy Burnham's government's tax and spending plans. The chancellor faces pressure to maintain financial market confidence as government borrowing costs have surged.

IMF Chief Economist Silvana Tenreyro told BBC News the UK stands out among G7 economies in managing debt. The organisation projects the UK will reduce annual borrowing by nearly four percentage points of GDP between 2025 and 2031, significantly outpacing other G7 nations, many of which are increasing deficits. The UK is on track to have the lowest annual borrowing in the G7 by 2031 and the longest maturity of debt, securing lower rates for longer.

Tenreyro advised the UK to "stay the course" on debt reduction. The IMF said households face continued cost-of-living pressure, with inflation expected to average 3.3% this year and remain above the Bank of England's 2% target at 2.8% in 2027. The Bank of England has predicted inflation could exceed 4% at the start of next year, making rate rises more likely.

The Resolution Foundation called on Healey to balance continued borrowing reductions with targeted support for families struggling to heat homes. Economists have suggested Healey must find £35bn to avoid public spending cuts while meeting defence commitments.

Conservative shadow chancellor Andrew Griffith warned that additional tax rises in the Budget would mean "slower growth" and working people would "pay for it".