Analysts warn OBR productivity downgrade could open £9bn fiscal hole ahead of UK autumn Budget

Analysts have warned Chancellor Rachel Reeves may face a substantially larger fiscal shortfall at the autumn Budget if the Office for Budget Responsibility (OBR) downgrades productivity forecasts, potentially creating a gap of at least £9 billion.

Economists said a modest cut to productivity growth assumptions — measured as output per worker — would widen the hole in public finances. Allan Monks, UK economist at JPMorgan, told the Financial Times that shaving 0.1 to 0.2 percentage points off productivity growth could create a shortfall of between £9 billion and £18 billion. Those briefed on Budget preparations told the FT the total fiscal gap could amount to "tens of billions" of pounds and possibly reach about £30 billion if downgrades are steeper.

The OBR is due to publish its forecast update ahead of Chancellor Reeves's autumn Budget, and officials have indicated the watchdog may take a more cautious view on productivity. The latest Office for National Statistics (ONS) data showed productivity fell in the second quarter compared with the same period a year earlier, adding to concerns about near-term growth prospects.

A Treasury spokesman said ministers would not "speculate on the forecast" and reiterated a commitment to "keeping taxes for working people as low as possible." Chancellor Reeves has previously delivered substantial tax increases, with about £40 billion announced at last year's Budget, and has not ruled out further measures this autumn.

The prospect of a larger-than-expected fiscal shortfall comes against a backdrop of weaker labour-market signals. The ONS reported that another 8,000 jobs were lost in the most recent month, bringing the total since the Chancellor's last Budget to 153,000. Those figures include contractions in private-sector employment such as retail, which the ONS said fell by 97,000 over the past year to a record low of 2.8 million.

At the same time, public-sector employment has continued to expand. The ONS data show roughly 6.2 million people now work in the public sector, an increase of 75,000 since the Labour government took office and the highest level since 2011. That includes about four million in central government roles and 2.1 million in the National Health Service.

Opposition politicians seized on the figures to criticise the government's approach to the public finances. Shadow Chancellor Sir Mel Stride attributed any downgrade in forecasts to what he called "economic mismanagement" and said the government was "using higher taxes to grow the state, not the economy." He warned that markets and businesses were losing confidence in the Chancellor.

Labour ministers and Treasury officials have said they are planning for a range of scenarios and that final policy decisions will reflect the OBR's updated assessment of the economy. Officials have told journalists they expect the OBR to take a conservative stance on productivity given recent data.

Analysts caution that measuring productivity and projecting its path remains challenging, particularly in the wake of structural shifts in the labour market and uncertain global growth. A downgrade to productivity assumptions has a direct effect on government receipts and borrowing projections because lower productivity implies smaller future tax bases and slower growth in public finances.

Market reaction to the prospect of downgraded forecasts and higher borrowing needs will be watched closely, as will any policy response from the Treasury. If the OBR does reduce its productivity assumptions, the Chancellor will face choices including spending restraint, tax increases, or alternative measures to close the gap, each with implications for growth and public services.

The OBR's forecast update and the Chancellor's Budget statement are now focal points for investors, businesses and political actors, who will scrutinise the scale of any adjustment to the public finances and the government's plan to address it.