Rachel Reeves set for £20bn OBR productivity downgrade
Rachel Reeves’ ballooning fiscal black hole is set to deepen as the fiscal watchdog hands the Chancellor its final productivity forecast on Friday.
The Treasury is already battling to contain public finances after a U-turn on welfare reforms ruined hopes of £5bn in savings, and a £190bn spending splurge on government departments helped erode the Chancellor’s wafer-thin £9.9bn fiscal headroom.
Reeves has consistently doubled down on her “iron clad” fiscal rules to fund day-to-day public spending through tax receipts.
But the commitment to the fiscal restraints has led to speculation that the UK will be hit with another fresh round of taxes come November 26 when she takes the dispatch box.
Fears have only been heightened by the Office for Budget Responsibility’s (OBR) productivity report, which is expected to widen the public finances gap.
The OBR is expected to downgrade the output per hour worked by 0.3 per cent—a figure first floated by the Financial Times.
The Institute for Fiscal Studies (IFS) have said that every 0.1 per cent downgrade would result in public sector net borrowing increasing by £7bn in 2029-2030.
This would mean the expected figure from the OBR would add nearly £21bn to the Budget black hole.
Higher taxes are on way
The Chancellor has begun to send clearer signals in recent weeks that tax hikes will be on the cards in the Budget.
Speaking at the Future Investment Initiative – or ‘Davos in the Desert’ – in Riyadh, Saudi Arabia, Reeves prepared investors for a more difficult Budget next month as she talked up her commitment to her fiscal rules.
In front of an audience of some of the world’s richest businessmen and women, Reeves said: “We are looking, of course, at tax and spending to ensure that we both have resilience against future shocks by ensuring we’ve got sufficient headroom, and also just ensuring that those fiscal rules are adhered to.”
Reports have also suggested Reeves is set to confirm a rise in the National Living Wage by four per cent in November – a move that could have dire implications for UK businesses.
Such a change would require employers to raise workers’ wages from £12.21 to at least £12.70 an hour.