Lower productivity forecasts directly increase the likelihood of tax rises because they create a fiscal shortfall that threatens the government’s borrowing rules. Productivity—measured as output per hour—determines the economy’s growth potential and consequently, tax revenues. When the Office for Budget Responsibility (OBR) revises its productivity growth forecast downward, it projects lower future GDP and tax income. According to the Institute for Fiscal Studies, each 0.1 percentage point reduction in productivity growth increases government borrowing by £7 billion by 2029–30. With Chancellor Rachel Reeves having only £9.9 billion in fiscal „headroom” to meet her borrowing targets, a modest 0.2 percentage point downgrade would eliminate this buffer entirely, forcing either spending cuts or tax increases to comply with fiscal rules.
The UK’s productivity challenges are not new but part of a long-term trend that has worsened the fiscal outlook. Since the 2008 financial crisis, productivity growth has averaged just 0.4% annually—a sharp decline from the 2% average between 1971 and 2009. This slowdown, more severe than in most other G7 nations except Germany and Japan, has been attributed to multiple factors including the aftermath of the financial crisis, austerity measures, and Brexit-related uncertainties. These elements have collectively dampened business investment and economic efficiency, creating a persistent drag on growth that complicates budget planning.
Given that departmental spending was already fixed in the June Spending Review, tax rises emerge as the most feasible tool for Chancellor Reeves to restore fiscal headroom. This situation underscores a broader dilemma: the government’s 2024 manifesto pledge not to raise taxes on working people is colliding with economic realities that were, to some extent, predictable. The OBR’s previous optimism on productivity—projecting 1.79% medium-term growth compared to the Bank of England’s 1.5% and the IMF’s 1.36%—suggests that the current downgrade should not come as a surprise, highlighting the inherent risks in basing fiscal commitments on uncertain economic forecasts.
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