IFS warns Reeves could need up to £18bn more for public services if productivity stalls

London — The Institute for Fiscal Studies warned that Chancellor Rachel Reeves could be forced to inject billions more into public services if the government fails to hit its productivity targets. The IFS said the government's spending plans hinge on ambitious efficiency gains to lift NHS and other services, but a shortfall could require a large spending top-up.

IFS analysis of the plans shows an assumed 2.9 per cent increase in input productivity, equivalent to about 1.0 per cent a year. That target is more than four times faster than the average annual growth rate between 1997 and 2019. The think tank cautioned that delivering only half of these improvements would require a £9 billion top-up in 2028-29 to maintain the current level of public-sector performance; if funding for productivity stays flat, that top-up could rise to £18 billion.

The report comes as the Office for Budget Responsibility is expected to review productivity forecasts and could downgrade them, potentially widening gaps in the public finances and leaving Reeves to find extra cash. Analysts at JPMorgan have noted that even small downgrades to productivity could create sizable holes in the budget; Allan Monks, UK economist at the bank, said that shaving 0.1 per cent to 0.2 per cent from productivity could translate into a shortfall of £9 billion to £18 billion.

Olly Harvey-Rich, a research economist at the IFS and co-author of the report, said the government is not the first to promise waste reduction and productivity gains for public services. The IFS paper stresses that meeting spending plans while delivering ambitious public-service commitments requires serious productivity growth, otherwise the Chancellor may face renewed pressure to top up funding in the coming years.

In the near term, the IFS analysis aligns with concerns raised by the Office for National Statistics, which showed productivity fell in the second quarter of this year compared with a year earlier. A downgrade to productivity forecasts also heightens the likelihood of a broader fiscal adjustment, including the possibility of tax measures in the autumn, should the government decide to shield public services from deeper cuts.

Looking farther ahead, the IFS argues that productivity gains are among the few levers available to meet growing demand for public services without universal tax increases. If Reeves stays on course with her stated goals, the public finances could stabilise; if not, the government may confront a higher required top-up to spend on health, education and other core services as the century unfolds.