The Office for Budget Responsibility (OBR) has reportedly told Chancellor Rachel Reeves that it will downgrade productivity forecasts for the UK economy, blowing a hole in the public finances and making tax hikes all but guaranteed at this year’s November Budget.
In another setback for the Labour government, the OBR has informed the Treasury that it is set to downgrade figures laid out in March that kept Reeves’ small £9.9bn headroom intact.
Officials briefed the Financial Times that Reeves would look to dodge blame for the downgrade by claiming that the previous Conservative government’s poor record on productivity had forced the fiscal watchdog to revise its calculations.
A source told the newspaper: “We don’t know precisely what they are going to say on productivity, but we have been given indications there will be a downgrade.”
“The untold story of this Budget is the historical legacy of the Conservatives that nobody knew about. The OBR productivity downgrade could amount to half or three-quarters of the fiscal hole.”
“This doesn’t reflect on what’s happened since the election, but we are the ones picking up the bill.”
The source also warned that the total fiscal hole could run to “tens of billions” of pounds. A 0.1 percentage point cut to forecasts could cost the government around £9bn, economists have said.
A downgrade to growth forecasts would wipe out at least £9bn of the Chancellor’s fiscal buffer while previous U-turns on welfare reforms have already cut it by around £6bn.
Rachel Reeves’ tax conundrum
City forecasters and think tanks have sparred on how harshly the OBR might score the Labour government on growth and borrowing costs.
The likes of Capital Economics have said that the Chancellor faces a shortfall of around £30bn while Deutsche Bank and JP Morgan have made slightly more moderate estimates.
The National Institute of Economic and Social Research (NIESR), however, said Reeves will have to find up to £50bn in extra taxes or savings to rebuild her headroom. The Chancellor has previously said she did “not recognise” NIESR’s forecasts.
She has also repeatedly said that the government’s £190bn Spending Review splurge would be protected, her fiscal rules were “non-negotiable” and that Labour would hold firm on its manifesto commitments not to raise income tax, employees’ national insurance or VAT.
But reports of the OBR’s briefing makes tax hikes this year almost certain, with pension pots, property owners and “working people”, who could be hit by an extension to a freeze on income tax bands, in the Treasury’s firing line.
Keir Starmer is also reportedly leading efforts to revive welfare reforms to curb spending, with benefits for working-age Brits currently projected to rise by over £25bn over the next five years.
Shadow Chancellor Mel Stride pushed back against claims made by Labour officials as he said any downgrade was due to the Chancellor’s “economic mismanagement”.
“Every time the numbers don’t add up, Rachel Reeves blames someone else,” Stride said.
“But the truth is the markets are losing confidence – and so is Keir Starmer, who’s now building his own Treasury team in Downing Street.
“Rachel Reeves will tax your children’s future to pay for her failure.”