Chancellor Rachel Reeves is confronting a significant fiscal challenge as the Office for Budget Responsibility (OBR) prepares to downgrade UK productivity forecasts, potentially creating a £9bn tax black hole. The revised outlook, expected ahead of the 26 November budget, increases the likelihood that Labour may breach its manifesto pledge not to raise income tax.
The OBR is planning to cut its trend productivity growth prediction by 0.3 percentage points, reflecting a downgrade of economic momentum since the 2008 financial crisis. According to the Institute for Fiscal Studies (IFS), each 0.1-point reduction adds £7bn to public sector net borrowing by 2029-30, suggesting a £21bn hit. However, other factors like lower borrowing costs may offset this, narrowing the fiscal gap to around £9bn.
Reeves, currently in Saudi Arabia, expressed frustration at the timing of the downgrade, stating it stems from past productivity issues rather than government policy. She emphasised the need for growth, saying, “I’m not going to do anything in the budget that reduces our opportunities to grow the economy.”
Speculation is mounting that Reeves may consider income tax rises, despite Labour’s manifesto commitments. The chancellor is also exploring raising £2bn by increasing national insurance for professionals such as doctors and lawyers employed through partnerships. A Treasury spokesperson declined to comment on speculation ahead of the OBR’s forecast, which will be published on 26 November.
