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The UK Chancellor is currently grappling with a larger-than-expected gap in the initial Budget numbers due to the ongoing issue of poor productivity in the country’s economy. It has been revealed that a downgrade in productivity performance by the government’s official forecaster could result in a £20bn gap in the public finances, according to the BBC’s sources. The Office for Budget Responsibility (OBR) is set to present its final draft forecast on the economy’s output per hour worked to the Treasury this Friday. Despite this development, the Treasury has chosen not to comment on any “speculation” until the OBR’s final forecast is unveiled on 26th November.
As Chancellor Rachel Reeves gears up for the Autumn Budget, there is increasing speculation about the decisions she will make regarding tax and spending. The OBR had previously anticipated a partial recovery in productivity growth, which has unfortunately failed to materialize. This assumption is crucial for the country’s long-term growth prospects and even a slight change can have a significant impact on how much money the Budget needs to raise. The latest reports suggest that the OBR has lowered the productivity forecast by 0.3 percentage points, aligning it more closely with the Bank of England’s forecasts. According to the Institute for Fiscal Studies, a 0.1 percentage point downgrade in the productivity forecast could lead to a £7bn increase in public sector net borrowing in 2029-30, potentially resulting in a £21bn Budget deficit due to the 0.3 point reduction.
With the productivity downgrade revealing an initial gap of around £20bn, instead of the previously expected £10-£14bn, the Chancellor may need to consider various options to address this shortfall. Potential solutions could include raising taxes, cutting public spending, or increasing government borrowing. Reeves acknowledged during a meeting with business leaders in Saudi Arabia that the OBR is likely to lower its productivity forecasts, attributing this poor performance to the aftermath of the financial crisis and Brexit. While there are some factors in the Budget that may offset this gap, such as lower interest rates on government debt, pressures like welfare spending U-turns and a desire to bolster the public finances buffer point toward the possibility of significant tax hikes, potentially breaching manifesto commitments like income tax. The Treasury is expected to present its initial Budget measures to the OBR next week for further evaluation
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