OBR downgrade could push Autumn Budget toward bigger tax rises, analysts warn

An expected downgrade to the Office for Budget Responsibility's productivity forecast is set to widen the hole in the public finances and could push Chancellor Rachel Reeves toward larger tax rises in the Autumn Budget.

Britain's OBR is due to publish its first forecast revision ahead of Reeves's Budget later this year. The current central projection assumes productivity growth of 1.1% per year over the medium term. A downgrade of 0.1 percentage point would widen the public finances gap by about £9 billion, according to Allan Monks, UK economist at JPMorgan.

The outlook worsens as Reeves faces a broader hole of roughly £20 billion to £50 billion to balance day-to-day spending with tax receipts by the time the Budget is announced in November. The government already contends with a roughly £6 billion shortfall after backtracking on welfare cuts and winter fuel payments. Growth has stalled partly due to a £25 billion hit from employer National Insurance taxes introduced in the last Budget, and higher borrowing costs are swelling debt interest payments.

Reeves is under pressure to avoid exposing herself to the political fallout from raising major revenue sources, including income tax, VAT or employee National Insurance, which she pledged not to increase in the manifesto. Analysts warn that focusing only on pensioners, landlords and some self-employed people may not produce enough revenue to close the gap.

Earlier this year the OBR admitted its growth forecasts had been too optimistic, a warning Treasury officials reportedly accepted. Officials resigned to the forecasting setback but remain frustrated that the watchdog has not acted sooner. Reeves is expected to contest any downward revision and has signaled pro-growth steps such as easing planning rules to speed airport and data center projects, which she argues would lift productivity and tax receipts over time.

The final OBR assessment will come after Reeves unveils her tax and spending plan to the watchdog shortly before the Budget. In the meantime, markets will watch long-term yields and gilt prices as investors digest how the revisions could alter debt dynamics and the pace of planned fiscal consolidation. Rising debt service costs already add to the pressure on the public finances as the government borrows to fund day-to-day needs.