OBR downgrade set to pave way for more tax hikes in Autumn Budget
Forecast downgrade could widen hole in public finances and pressure Reeves to consider tax rises in November
An expected downgrade by the Office for Budget Responsibility to its productivity forecast is set to sharpen the pressure on Chancellor Rachel Reeves as she prepares the Autumn Budget. Officials are preparing a lower medium-term productivity growth assumption, a move that would complicate meeting the government’s fiscal rules and increase the likelihood of tax increases in November.
Currently the OBR assumes productivity growth of 1.1% a year over the medium term. Cutting that forecast by 0.1 percentage point would mean Reeves would have to find about £9 billion to make the numbers add up, according to Allan Monks, UK economist at JPMorgan. The result would be a larger hole than previously anticipated, with estimates placing the overall gap in the low tens of billions and potentially pushing the balance to between £20 billion and £50 billion. The government already faced a roughly £6 billion shortfall after back-tracking on welfare cuts and winter fuel payments. Higher debt costs since the summer would also lift the debt-interest bill in coming years.
Reeves had pledged after last year’s Budget that she would not come back with more tax increases or extra borrowing. But the scale of the hole has prompted renewed debate about whether to revisit the pledge not to raise income tax, VAT or employee National Insurance. Some analysts warn that targeting pensioners, landlords and certain self-employed people with National Insurance would not raise enough money to plug the hole.
To justify any uptick in revenue, Reeves is expected to argue for pro-growth measures that could lift long-run growth, such as easing planning restrictions to allow more airport runways and data centres to be built. She is also expected to present a plan that she believes will expand the economy enough to improve the government's headroom under its fiscal rules. The Office for Budget Responsibility will issue its final verdict on the public finances after Reeves reveals her tax and spend plans to the watchdog shortly before the Budget.
Officials have long noted that the OBR's productivity projections have repeatedly overestimated output per hour worked in the long run. In July the OBR admitted it had been too optimistic in its past growth forecasts, and Treasury officials reportedly resigned to a significant downgrade. They have expressed frustration that the watchdog has not acted sooner, given its independent remit since 2010.
Reeves faces a narrow headroom: about £9.9 billion, a historically low buffer against her rule that day-to-day spending should be funded entirely from taxes by the end of the decade. If the productivity downgrade is large, the Chancellor could be compelled to raise taxes or trim spending further to keep the books in balance. Any plan will likely include a mix of revenue-raising steps rather than a single levy.
As the Budget approaches, the government will await the OBR's final assessment of the public finances, then align tax and spending proposals with the forecaster’s numbers. While the Chancellor has signaled a focus on growth, the path to closing the gap may require measures that go beyond the manifesto pledge, including renewed examination of eligible tax bases and broader welfare policy adjustments. The final numbers will help determine the trajectory for debt service costs and the state’s borrowing outlook in coming years.
This is Money will continue to monitor how the OBR’s forecast aligns with Reeves’s tax and spending plans ahead of the Autumn Budget.
