Rachel Reeves is under pressure to find up to £30bn in tax rises or spending cuts ahead of her 26 November budget, after the Office for Budget Responsibility (OBR) is expected to cut its productivity growth forecasts. The move, which will shape the fiscal headroom available to the chancellor, has sparked tensions between the Treasury and the independent watchdog.
The OBR is anticipated to reduce its long-term productivity outlook by up to 0.2 percentage points, bringing it in line with other forecasters. This alone would knock £20bn off Reeves’s fiscal headroom, with a further £10bn hit expected from recent policy U-turns and rising government borrowing costs. Labour insiders have expressed frustration that the downgrade did not occur earlier, which could have prevented the previous government’s national insurance cuts.
Treasury officials are attempting to persuade the OBR to factor in the benefits of Labour’s pro-growth policies, including planning reforms and potential trade deals with India and the EU. However, economists like Michael Saunders of Oxford Economics have expressed scepticism that such measures would justify a higher productivity forecast than the current OBR base case.
Ministers are also considering a proposal to limit the OBR’s spring forecast to economic growth, with only the autumn forecast measuring the chancellor’s compliance with fiscal rules. This idea, recently suggested by the IMF, aims to reduce market speculation. However, OBR director Richard Hughes has opposed the change, warning it would damage fiscal transparency.
Former OBR committee member Andy King noted that the downgrade was overdue, as the OBR had become an outlier with overly optimistic projections. He added that the underlying message of the forecast would have been difficult at any time, but the revision was necessary to reflect economic reality.
