UK OBR Productivity Downgrade Expects £20bn Fiscal Shortfall for Chancellor Reeves

The UK is facing a significant economic challenge as the Office for Budget Responsibility (OBR) has downgraded its productivity growth forecast by 0.3 percentage points, which could widen the public finance gap by approximately £20-£21 billion. This downgrade reflects persistent weak productivity since the 2008 financial crisis and Brexit, and it pressures Chancellor Rachel Reeves to address a larger budget shortfall ahead of the upcoming budget. The downgrade may force the government to reconsider tax policies, including potential income tax increases, despite previous manifesto pledges not to raise income tax, VAT, or national insurance. The Institute for Fiscal Studies estimates that every 0.1 percentage point reduction in productivity growth increases borrowing by around £7 billion, potentially pushing borrowing up by about £21 billion. Reeves has acknowledged the downgrade is due to past productivity performance rather than current government actions but indicated she will consider tax rises and spending adjustments to maintain fiscal resilience. The situation has sparked political debate and market concerns, with the government weighing options such as extending income tax threshold freezes and other fiscal measures to manage the fiscal headroom against future economic shocks.