Inflation is set to drop below the Government’s 2% target rate within a “few months” amid more positive predictions for growth.

However the Office for Budget Responsibility warned the slowdown in inflation could be derailed by conflict in the Middle East and surge as much as 7% in a worst-case scenario.

The OBR said the UK was set to recover from the technical recession seen in the latter half of 2023 faster than its previous forecasts and estimates by economists.

It estimated UK gross domestic product (GDP) would grow 0.8% this year, up from the 0.7% it forecast in November, and twice the consensus among economists of 0.4%. 

The OBR also upgraded its growth forecast for next year from 1.4% to 1.9%.

The forecaster also predicted inflation, which fell from 11% to 4% last year, would fall quicker than previously predicted, after corrective Bank of England hikes saw interest rates peak at 5.25%.

In a report accompanying Jeremy Hunt’s spring budget, the OBR said it expected Consumer Prices Index (CPI) inflation to average 2.2% this year, down from a previous 3.6% forecast.

However, it warned that if the Israel-Hamas conflict led to widening of tensions in the Middle East, it could create an energy price shock and push inflation as high as 7%.

With a cut in National Insurance from 10 to 8%, Mr Hunt said his Budget package would reduce personal taxes to their lowest level for almost 50 years.

However, the OBR said the overall tax burden was still set to rise to its highest level since 1948, to 37.1% of GDP in 2028/29, or 4% of GDP higher than before the Covid pandemic.

The watchdog said many of Mr Hunt’s calculations were based on having “headroom”, or leeway, of £8.9bn in 2028/29, which it described as “a historically modest margin”, warning a wide range of events could force a rethink.

OBR chairman Richard Hughes said some widely expected spending commitments could also wipe out this headroom over the next five years.

“If the defence budget is increased to 2.5% of GDP by 2030 as pledged, we think that would have an impact of £15bn to £16bn against that headroom,” he said.

“There would also be a further £4.5bn impact if fuel duty is frozen in the coming years.”

The OBR also predicted Government in-year borrowing will fall quicker than expected.

State borrowing is set to fall from 4.2% of GDP this year to below the 3% target in 2025/26, three years earlier than previously thought.