OBR risks being ‘unreasonably pessimistic’ amid Reeves benefit

Friday 10 October 2025 2:07 pm

The Workplace for Price range Accountability (OBR) dangers being “unreasonably pessimistic” if it decides to downgrade productiveness progress developments by greater than 0.1 share level, recent evaluation has indicated, in what might hand Chancellor Rachel Reeves some further leeway at this yr’s Price range. 

The fiscal watchdog is broadly anticipated to downgrade productiveness forecasts as a part of its supply-side assessment, basing figures on low productiveness ranges underneath the earlier Conservative authorities to the frustration of the Labour authorities. 

A downgrade to productiveness forecasts by 10 foundation factors alone might fully wipe out Reeves’ £9.9bn headroom and threat resulting in additional tax hikes, including to larger borrowing funds than anticipated in addition to prices from coverage U-turns. 

However recent modelling by Pantheon Macroeconomics has recommended that productiveness ranges have been higher than OBR forecasts on some measures. 

It mentioned latest progress information revisions by the Workplace for Nationwide Statistics (ONS) pointed to larger official output-per-hour ranges than anticipated. 

Economists additionally mentioned productiveness progress’s dependence on the Labour Drive Survey (LFS), an “unreliable” measure taken by the ONS, may very well be appeared over. 

Pantheon Macroeconomics analysts Rob Wooden and Elliott Jordan-Doak mentioned productiveness progress primarily based on HMRC information hit 2.1 per cent on an annual foundation within the second quarter of the yr, larger than when information from the LFS was used. 

Additionally they mentioned productiveness progress within the second quarter of the yr primarily based on each ONS and HMRC payroll information was larger than the OBR forecast whereas there have been indicators of optimism for productiveness progress to rebound within the coming years. 

“It appears unreasonably pessimistic to us to imagine productiveness will stay virtually stagnant endlessly, matching the development over the previous 15 years,” Wooden and Jordan-Doak wrote in a brand new report. 

“AI has the potential to be the following ‘general-purpose’ know-how that enhances effectivity. Furthermore, sturdy UK enterprise funding within the first half of 2025, and indicators from rising company borrowing that funding will continue to grow, bode properly.”

They mentioned that whereas productiveness within the second quarter of the yr remained one share level under developments seen between 2010 and 2023, productiveness developments ought to solely be forecast at a barely decrease stage. 

Reeves to face ‘£25bn fiscal gap’

A 0.1 share level discount to productiveness a yr has led Pantheon to estimate the fiscal gap awaiting Reeves to be price £25bn, a barely extra optimistic estimate than forecasters at Capital Economics and the Nationwide Institute of Financial and Social Analysis (NIESR). 

Larger curiosity prices on debt servicing and welfare U-turns are more likely to pressure Reeves to boost income. 

Economists are additionally weighing in on which taxes the Chancellor ought to hike, with a break from Labour manifesto commitments to not elevate earnings tax or VAT seen as the popular possibility. 

However Labour ministers might but discover some financial savings by welfare reforms. Proposed adjustments to unemployment advantages might save as much as £3bn, evaluation by the Institute for Fiscal Research has proven.