Rachel Reeves faces a bigger-than-expected £20bn hit to the UK public finances in next month’s budget, increasing the likelihood that the chancellor will breach a key Labour manifesto pledge not to raise income tax. The Treasury’s forecaster, the Office for Budget Responsibility (OBR), is preparing a steeper than anticipated cut to UK productivity for the next five years, the Guardian understands.
The OBR is planning to cut its trend productivity growth prediction by 0.3 percentage points after a downgrade of the UK’s economic momentum since the 2008 financial crash. Reeves is understood to be furious that the OBR has chosen her second budget to downgrade the figure, which indicates how effectively workers can do their jobs and underpins forecasts of economic growth.
Labour said in its election manifesto that it would not increase income tax, VAT or national insurance, but Reeves could say that the revisions by the OBR upend her calculations, forcing the government to renege on earlier commitments. Speaking at the Fortune Global Forum in Riyadh, she said: “Our independent forecaster is likely to downgrade the forecast for productivity in the UK based not on anything this government has done, but on our past productivity numbers, which, to be honest, since the financial crisis and Brexit have been very poor, and that just shows how essential growth is.”
The estimated impact is based on calculations by the Institute for Fiscal Studies (IFS), which has said that each 0.1-percentage-point downgrade to productivity would increase public sector net borrowing by £7bn in 2029-30. That suggests a 0.3-point reduction could result in a £21bn hit to the public finances. Some analysts had been forecasting a 0.1 to 0.2-point downgrade, resulting in a smaller hit of between £7bn and £14bn, leading to a total fiscal hole of £20bn to £30bn.
A larger downgrade could increase that shortfall, but other factors including lower borrowing costs and faster-than-expected growth may offset it. Allan Monks, an economist at JP Morgan, said the productivity downgrade could reach almost £27bn, but a fall in debt financing costs or more people entering the jobs market may help limit the damage. Reeves is also planning to raise an additional £2bn by increasing national insurance for doctors, lawyers and accountants employed through partnerships.
A Treasury spokesperson said: “We won’t comment on speculation ahead of the OBR’s forecast, which will be published on 26 November.”
