Reeves could face £20bn Budget hole as UK productivity downgraded
As it prepares for next month's Budget, the government is facing a larger-than-expected dip in the public budget. According to the BBC, a downgrade of the UK's productivity by the government's top strategist could result in the chancellor facing a £20 billion deficit in complying her tax and budget legislation. In next month's Budget, Rachel Reeves has reported that both tax increases and budget reductions are choices. The Treasury declined to comment on speculation
ahead of the Office of Budget Responsibility's (OBR) final forecast, which will be released alongside the Budget on Friday.
On Friday, the OBR will deliver its final draft forecast, which includes productivity - a measure of the economy per hour worked - to the Treasury. The forecaster had hoped for a slight increase in productivity growth, but this hasn't materialized. This productivity assumption is critical to long-term growth prospects, and under the new framework, even a small change can affect how much money a Budget must raise by several billion pounds. According to reports, the OBR has revised the forecast for productivity by 0. 2 points. 3 percentage points - a figure first reported by the Financial Times - brings the Bank of England's estimate closer to that of the Bank Of England. According to the Institute for Fiscal Studies, every 0. 75 people have been estimated that for every 0. A 1 percentage point downgrade in the productivity forecast, government borrowing will rise by £7 billion in 2029-30, implying a decrease of 0. A 3 point cut could add £21 billion to the Budget hole. The shifts open a £20 billion difference rather than the £10-£14 billion awaited. Such a gap could be filled by raising taxes, lowering public service, or increasing government borrowing. Reeves has written down two main Budget guidelines, which she has described as
likely to downgrade productivity,non-negotiable. These are: Reeves told Saudi Arabia's business leaders on Monday that the OBR is
which has beenvery bad" since the financial crisis and Brexit has been present. The OBR is expected to elaborate on the decision in depth, but several ministers have openly stated that if it had done this earlier, different choices might have been made at this summer's Spending Review. Several other important parts of the Budget include the decline in the interest rates paid on government debt, which may have improved news for the chancellor. However, with other pressures such as the U-turns on welfare reforms and the desire to rebuild a larger buffer in the public budget, speculation is point towards significant tax hikes, as well as other potential miscalculations, such as changes to income tax reforms. Next week, the Treasury will notify the OBR of its first draft Budget proposals.
