Chancellor Rachel Reeves has been dealt a major setback to her November Budget plans after the UK’s fiscal watchdog signalled it will slash productivity forecasts in a move that could blow a huge hole in the nation’s finances and all but guarantee tax hikes.
The Office for Budget Responsibility has reportedly told Treasury officials that March’s projections will be downgraded, leaving Reeves’s slim £9.9billion fiscal cushion hanging by a thread.
Government insiders explained that the revision could wipe out much of the buffer.
"We don't know precisely what they are going to say on productivity, but we have been given indications there will be a downgrade," a government source told the Financial Times.
Economists warn that even a 0.1 percentage point cut in forecasts could cost the Treasury around £9 billion.
Treasury insiders are blaming the Conservatives for the worsening fiscal crisis, arguing the incoming Labour government is being forced to deal with a hidden legacy.
One source said: "The untold story of this Budget is the historical legacy of the Conservatives that nobody knew about."
The insider claimed the productivity downgrade could account for "half or three-quarters of the fiscal hole," stressing: "This doesn't reflect on what's happened since the election, but we are the ones picking up the bill."
They warned the full gap could run into "tens of billions" of pounds.
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In the UK’s current situation, the forecast for productivity growth up to 2029/30 is also a make-or-break factor for meeting the chancellor’s fiscal rules
|ONS/OBR
Financial institutions have also sounded the alarm. Capital Economics projects a shortfall of around £30billion, while Deutsche Bank and JP Morgan forecast slightly smaller figures.
But the National Institute of Economic and Social Research has issued the bleakest outlook, warning Ms Reeves may need to find as much as £50billion through new taxes or spending cuts. The Chancellor has insisted she does "not recognise" NIESR’s projections.
Lindsay James, investment strategist at Quilter, said estimates for the budget hole range between £20billion and £50billion. "While that is a wide range, it means one thing for a government that has shown it will struggle to cut spending, more tax rises," she said.
The Chancellor has maintained that her government's £190billion Spending Review would remain protected and described her fiscal rules as "non-negotiable." She has also pledged to honour Labour's manifesto commitments against raising income tax, employees' national insurance or VAT.
The anticipated OBR downgrade renders tax increases virtually inevitable.
| GETTYHowever, the anticipated OBR downgrade renders tax increases virtually inevitable. Treasury officials are reportedly considering pension savings, property owners and "working people" as potential targets, with the latter possibly facing an extended freeze on income tax thresholds.
Prime Minister Keir Starmer is allegedly spearheading attempts to resurrect welfare reforms to reduce expenditure. Benefits for working-age citizens are currently forecast to increase by more than £25bn over the coming five years, adding further strain to the public purse.
Shadow Chancellor Mel Stride rejected the government's attempts to blame the Conservatives for the fiscal challenges. "Every time the numbers don't add up, Rachel Reeves blames someone else," Stride stated.
He added: "But the truth is the markets are losing confidence and so is Keir Starmer, who's now building his own Treasury team in Downing Street. Rachel Reeves will tax your children's future to pay for her failure."
Rachel Reeves has previously called for the OBR to be scrapped | GETTY / OBR graph The productivity downgrade arrives as UK economic growth shows signs of stagnation.
GDP failed to expand month-on-month in July and grew just 0.2 per cent on a three-monthly basis, with production output declining by 1.3 per cent.
Lindsay James warned that with over two months until the Budget, "GDP readings for the second half of the year are unlikely to be pretty reading."
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