Productivity downgrade could force Chancellor to find up to £30bn, analysts warn

Analysts warned that the Chancellor may have to identify billions more in measures at the autumn Budget if the Office for Budget Responsibility (OBR) downgrades productivity forecasts, with shortfalls of between £9 billion and £18 billion cited and some briefings suggesting a fiscal hole could reach "tens of billions".

A reduction in the OBR's assumptions for productivity — measured as output per worker — would lower expected tax receipts and widen the gap between planned spending and revenues, increasing pressure on Chancellor Rachel Reeves to find further tax rises or spending cuts before the next fiscal statement.

Allan Monks, UK economist at JPMorgan, told the Financial Times that trimming productivity forecasts by 0.1 to 0.2 percentage points could create a fiscal shortfall of about £9 billion to £18 billion. Officials briefed on Budget preparations told the FT they had been given indications the OBR would downgrade productivity assumptions when it publishes its forecast ahead of the autumn Budget.

The latest Office for National Statistics (ONS) figures showed productivity fell in the second quarter compared with the same period a year earlier, a development that would factor into the OBR's assessments. Economists said weaker productivity assumptions translate directly into lower growth projections and reduced public finances, narrowing the room for manoeuvre in fiscal plans.

A Treasury spokesman said the department would not speculate on the OBR's forecast and reiterated a commitment to "keeping taxes for working people as low as possible." Chancellor Reeves has previously announced around £40 billion of tax-raising measures at last year's Budget and has repeatedly declined to rule out further tax changes this autumn.

The potential for a larger fiscal gap has prompted political and market attention. Shadow Chancellor Sir Mel Stride said any downgrade would be the result of "economic mismanagement" by the Chancellor and accused the government of shifting blame for weak numbers onto predecessors. The Treasury spokesman declined to comment further on those criticisms.

Separate ONS data published in recent days showed shifts in the labour market that officials and analysts said will shape the fiscal outlook. The statistics indicated that 8,000 jobs were lost in the most recent month measured, taking the total jobs shed since the Chancellor's last Budget to 153,000. At the same time, public-sector employment rose to about 6.2 million, an increase of 75,000 since the current government took office and the highest level since 2011, the ONS reported.

The composition of the labour market also showed sectoral weakness: retail employment fell by 97,000 over the past year to a record low of about 2.8 million. Some commentators warned that continued private‑sector job losses, combined with a growing public‑sector workforce, could heighten political and economic pressure on the government to adjust taxes or spending priorities.

Officials and analysts preparing Budget scenarios have told journalists that the total fiscal shortfall could amount to "tens of billions" depending on the scale of any OBR downgrades, with some briefings suggesting it could approach £30 billion. The OBR's formal assessment will set the parameters for the Chancellor's options and is expected to be central to fiscal planning ahead of the autumn Budget.

The OBR, an independent fiscal watchdog, will publish its forecast as part of the Budget process. Its revisions to productivity, output and employment assumptions will be closely watched by markets, investors and policymakers for signals on the government's likely need to raise revenue or reduce spending in coming months.