Billions of pounds of government spending will fuel higher than expected growth in the UK economy this year, though it will not be sustained into 2026, according to an independent think tank.

EY Item Club has raised its target for UK growth in 2025 to 1.5%, from 1% “largely due to increases in government spending”.

Projections from the Office for Budget Responsibility (OBR), the UK’s official forecaster, suggest government spending will surge to £1.3 trillion over this fiscal year, about £100 billion higher than 2023-24.

However, it expected to downgrade the UK’s potential growth when it reports on budget day, based on a reassessment of productivity growth.

EY Item Club says more restrained public spending and potential tax rises to be announced by Rachel Reeves at the budget on 26 November will put a brake on this growth, bringing GDP growth back to 0.9% next year before picking up to 1.3% in 2027.

Anna Anthony, EY UK and Ireland regional managing partner, said: “The UK economy has shown encouraging resilience and momentum this year, particularly in the face of significant global disruption.”

However, Matt Swannell, chief economic adviser to the EY Item Club, said: “The combination of potential tax rises, global trade disruption and high interest rates is still anticipated to put a brake on economic momentum and produce modest growth over the next year.”

EY Item Club predicts that there would be two quarter point cuts in interest rates cuts by the middle of 2026.

City analysts are divided over whether the Bank of England will cut interest rates this week. TD Securites and Danske Bank have joined Goldman Sachs and Nomura in expecting a 25 basis point cut. Berenberg economist Andrew Wishart expects the Monetary Policy Committee (MPC) to vote 6-3 in favour of keeping bank rate on hold, thereby ending a sequence of five once-per-quarter 25 basis points cuts.

“The risk that robust nominal demand encourages companies to rebuild their profit margins by raising prices outweighs the downside surprise in wage growth in August and in CPI inflation in September, in our view,” he said.