Lower productivity assessed by OBR deals a significant pre-Budget setback to Rachel Reeves
The Office for Budget Responsibility (OBR) is reportedly planning to downgrade productivity forecasts for the UK economy, potentially causing a significant strain on the nation's public finances. This revelation comes as Chancellor Rachel Reeves prepares to present her first Budget later this year.
According to reports, a 0.1 percentage point cut to forecasts could cost the government around £9bn. This downgrade could amount to half or even three-quarters of the fiscal hole, which is estimated to run into "tens of billions" of pounds.
The OBR's decision to revise its calculations is attributed to the country's poor record on productivity, a factor that officials have briefed to the Financial Times. However, Shadow Chancellor Mel Stride has pushed back against this claim, stating that any downgrade in productivity forecasts is due to the Chancellor's "economic mismanagement."
The downgrade in productivity forecasts is expected to blow a hole in the public finances, with the National Institute of Economic and Social Research (NIESR) estimating that Chancellor Rachel Reeves may need to find up to £50bn in extra taxes or savings to rebuild her fiscal headroom. The economist associated with high estimates for necessary tax increases or savings for Rachel Reeves' government is Paul Johnson, the director of the Institute for Fiscal Studies.
Capital Economics predicts a shortfall of around £30bn for the Chancellor, while Deutsche Bank and JP Morgan have made slightly more moderate estimates. The Treasury, however, has stated that it is not going to speculate on the OBR's forecast.
It's important to note that at the last Budget, the Treasury protected working people's payslips and did not raise the basic, higher, or additional rates of income tax, employee national insurance, or VAT. The Treasury is also committed to keeping taxes for working people as low as possible.
This potential fiscal strain comes as Keir Starmer is reportedly leading efforts to revive welfare reforms to curb spending, with benefits for working-age Brits currently projected to rise by over £25bn over the next five years. However, the impact of these reforms on the fiscal situation remains to be seen.
As the Budget approaches, the government and opposition parties will need to navigate these economic challenges while addressing the needs of the British public. The outcome of these decisions could shape the economic landscape for years to come.
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