The UK government is grappling with a larger-than-anticipated gap in public finances as preparations are made for the upcoming Budget next month. A downgrade in the country’s productivity performance by the Office for Budget Responsibility (OBR) may result in a £20 billion shortfall for Chancellor Rachel Reeves in meeting her fiscal goals. Both tax increases and spending cuts are being considered to address this gap.
The OBR is set to release its final draft forecast, which involves productivity metrics— a crucial factor in economic output per hour worked— to the Treasury on Friday, just before the Budget announcement on 26 November. Previously, the agency expected some recovery in productivity growth, a rebound that has not occurred. Changes in productivity forecasts can significantly affect Budget revenue requirements, with even minor adjustments potentially influencing the financial landscape by several billion pounds.
Recent reports indicate the OBR has lowered its productivity forecast by 0.3 percentage points, aligning it more closely with the Bank of England’s projections. The Institute for Fiscal Studies has estimated that each 0.1 percentage point reduction in the productivity forecast could increase government borrowing by about £7 billion by 2029-30, suggesting that the recent downgrade could add £21 billion to the financial shortfall.
Consequently, this situation opens a deficit of approximately £20 billion, up from earlier estimates of £10-£14 billion. The government may remedy this gap through tax hikes, public spending cuts, or increased borrowing. Reeves has outlined two critical fiscal rules: not borrowing for day-to-day expenses by the end of the current parliament, and decreasing government debt relative to national income within the same timeframe.
Reeves has acknowledged the likelihood of the productivity downgrade during a recent meeting with business leaders in Saudi Arabia, noting the persistent poor performance since the financial crisis and Brexit. The OBR is expected to clarify its reasoning, while some ministers have expressed that earlier insights could have influenced prior Spending Review decisions. Meanwhile, potential decreases in interest rates on government debt and other dynamic factors in the Budget could influence future outcomes. The Treasury is expected to share its draft Budget measures with the OBR next week.
Source: https://www.bbc.com/news/articles/c0rpve82jxvo?at_medium=RSS&at_campaign=rss