IFS warns Reeves could face up to £18bn top-up to public services if productivity stalls
New IFS analysis says hitting productivity targets is essential to avoid extra spending; OBR downgrades could worsen finances
London — The Institute for Fiscal Studies warned last night that Chancellor Rachel Reeves could be forced to inject billions more into public services if productivity fails to improve. The think tank said Reeves is banking on ambitious efficiencies to lift the NHS and other services, but warned that missing the target for increasing productivity could require a sizeable top-up to public spending—potentially up to £18 billion.
IFS said the government's plans imply a 2.9% increase in input productivity, equivalent to about 1.0% per year, a pace more than four times the average annual growth from 1997 through 2019. If the government delivers only half of its planned productivity improvements, achieving the same level of public-sector performance would require a £9 billion top-up in 2028-29; if funding productivity stayed flat, the top-up would rise to £18 billion, the think tank said.
Latest ONS figures showed productivity fell in the second quarter of this year relative to a year earlier. The prospect of a downgrade by the Office for Budget Responsibility to productivity forecasts could heighten the risk of policy responses to close a shortfall, analysts said.
"Olly Harvey-Rich, a research economist at the IFS and co-author of the report, said: "This isn't the first government to promise to reduce waste, raise productivity and improve the efficiency of public services. But if this government wants to stick to its spending plans while also fulfilling its commitments on public services, delivering serious productivity growth is essential. Failure would increase pressure on the Chancellor to top up spending.""
In the longer term, productivity gains are perhaps even more important, as they are among the few ways public services will be able to meet growing demand without ever-increasing taxes.
The warnings come as policymakers weigh productivity prospects amid a broader debate about how governments fund expanding services in a world of uneven growth, with forecasts and plans hinging on variables that can shift quickly.