Steeper UK productivity cut of more than £20bn makes tax rises more likely

Rachel Reeves will have to account for a bigger-than-expected £20bn hit to the public finances in next month’s budget, the Guardian understands, as the Treasury’s forecaster prepares to cut predictions for UK productivity. The Office for Budget Responsibility (OBR) is planning to cut its trend productivity growth prediction by 0.3 percentage points, in a move that increases the likelihood of the chancellor announcing tax rises on 26 November. Reeves told the Fortune Forum in Saudi Arabia on Monday: “Our independent forecaster is likely to downgrade the forecast for productivity in the UK based not on anything this government has done, but on our past productivity numbers, which, to be honest, since the financial crisis and Brexit have been very poor, and that just shows how essential growth is. “So I’m not going to do anything in the budget that reduces our opportunities to grow the economy. That’s very important.” Related: UK reportedly faces more than £20bn hit from steeper productivity downgrade, fuelling tax rise speculation – business live The estimated impact is based on calculations by the Institute for Fiscal Studies (IFS) thinktank, first reported in the Financial Times, which has said that each 0.1-percentage-point downgrade to productivity would increase public sector net borrowing by £7bn in 2029-30. That suggests that a 0.3-point reduction could result in a £21bn hit to the public finances. Some analysts had been forecasting a 0.1 to 0.2-point downgrade in the OBR’s productivity outlook, resulting in smaller hit to the public finances of between £7bn and £14bn, based on IFS calculations. This would result in a total fiscal hole of £20bn to £30bn, according to some estimates. A larger downgrade to productivity by the OBR would increase that shortfall. However, the final number could be offset by other factors including lower borrowing costs and faster-than-expected growth. The news has increased expectations that the chancellor will be forced to breach one of the Labour’s election manifesto pledges with a potential income tax rise in next month’s budget. The Guardian reported last week that the chancellor was already in active discussions over an income tax rise to help reduce a multibillion-pound shortfall in the public finances. Reeves is understood to be nervous about the political consequences of such a major abandonment of the party’s previous pledges. However, comments in recent weeks appear to be opening the door to a possible U-turn since news of the likely productivity hit emerged in the September. Last week the chancellor said a heavier-than-anticipated blow from Brexit and austerity meant she was braced for a sharp downgrade from the OBR. The watchdog is due to present its outlook to the Treasury on Friday. Reeves is facing one of the most difficult budgets any chancellor has contemplated in recent years. As speculation over income tax rises swirl, Reeves is also planning to raise an additional £2bn by increasing national insurance for doctors, lawyers and accountants who are employed through partnerships. A Treasury spokesperson said: “We won’t comment on speculation ahead of the OBR’s forecast, which will be published on 26 November.”