New Productivity Forecasts Put Rachel Reeves Fiscal Rules At Risk

Chancellor Rachel Reeves faces a new challenge as the Office for Budget Responsibility (OBR) prepares to downgrade its key productivity forecast. According to sources within the Treasury, the government’s independent watchdog has conducted a review of its predictive models, which will result in a less optimistic outlook for UK growth. This move could significantly undermine Reeves’ attempts to meet her fiscal rules without major interventions in the upcoming budget.

Officials suggest that the OBR intends to make a substantial reduction to its productivity figures, opting for a decisive revision instead of smaller, incremental changes. Consultancy firm Oxford Economics estimates that aligning productivity projections with the independent average would result in a 1.4 percent drop in GDP by the end of the next five-year period. Such a scenario would require Reeves either to increase taxes or reduce spending by £20bn to preserve her current £10bn margin for error—comparable to raising both main and higher rates of income tax by 2p.

Reeves is expected to highlight the UK economy’s long-standing issues with productivity and reiterate her commitment to addressing these problems through a targeted programme of investment. Simultaneously, ministers in the Treasury are seeking to persuade the OBR to factor in the potential impact of government policies like planning reforms, though these gains may be heavily outweighed by the expected downgrade in productivity forecasts.

In addition to dealing with weaker productivity numbers, Reeves also must account for the fiscal costs of recent political reversals, including changes to the winter fuel allowance and reforms to welfare. The widespread view is that the Chancellor could be forced to announce tax rises in the coming budget, scheduled for 26 November, prompting considerable speculation over how extra revenue might be found.

Proposals such as a windfall tax on banks have already unsettled financial markets, with a recent report from the Institute for Public Policy Research triggering a notable selloff in bank shares. Any potential tax initiatives will face heightened scrutiny from the newly strengthened “budget board”, established to avoid the business backlash experienced after last year’s budget.

Industry groups, including the CBI, are urging Reeves to revisit Labour’s manifesto pledges not to increase national insurance, VAT or income tax rather than targeting businesses once again. A Treasury spokesperson maintains that the government remains committed to keeping taxes on working people as low as possible, referencing earlier decisions to protect income tax and national insurance rates. With the OBR’s new forecasts looming, pressure is mounting for the Chancellor to chart a careful path through fiscally choppy waters while aiming to boost the UK’s flagging productivity.