Why does lower productivity mean tax rises are more likely?
14 minutes agoBen ChuBBC Verify
Getty ImagesChancellor Rachel Reeves is contemplating tax rises in her Budget on 26 November.
And she has said one of the key reasons is that the government’s official forecaster, the Office for Budget Responsibility (OBR), is going to lower its UK productivity growth forecast for the coming years.
So why would lower UK productivity forecasts lead to tax rises?
And is this something the government could have anticipated before it pledged not to raise taxes on working people in its 2024 election manifesto?
BBC Verify has been looking into the statistics.
What is productivity?
Productivity is the amount of goods and services the entire UK economy produces for each hour of work done by everyone in the working population, also known as “output per hour”.
It gives an indication of how efficiently a country’s economy is using its workforce and equipment to produce these goods and services – and so how productive a country is.
A country with higher levels of productivity often has higher average wages and incomes.
In the Spring Statement in March 2025 the OBR projected total UK productivity would grow by around 1% each year over the next five years.
If productivity grows more slowly it means overall GDP growth – and overall tax revenues – will be lower than previously expected.
The Institute for Fiscal Studies (IFS) think tank has estimated each 0.1 percentage point downgrade in the official productivity growth forecast increases projected government borrowing by £7bn in 2029–30.
That is the year when the government’s chosen borrowing rules require it to balance day-to-day spending with tax revenues, essentially so it’s not borrowing for anything except investment.
So if the OBR downgraded its forecast for average UK productivity growth over the next five years from 1% to 0.8% (-0.2 percentage points) that revision would increase projected borrowing in 2029-30 by £14bn.
In March, the chancellor gave herself “headroom” against meeting her borrowing rules in 2029-30 of only £9.9bn. In other words, this was the leeway between meeting and not meeting her rules.
That means an OBR productivity forecast downgrade of 0.2 percentage points (£14bn) would, on its own, wipe away this headroom, pushing the government into a projected deficit in that year.
And if the chancellor wanted to restore that headroom against her rules she would need to either cut government spending or raise taxes by an equivalent amount.
Given the spending budgets of departments were fixed in the June Spending Review, the chancellor is expected to try to restore her headroom against her fiscal rules by raising taxes.
What’s been happening to UK productivity over a longer period?
The UK’s productivity growth has been unusually weak since the financial crisis.
Between 1971 and 2009, UK output per hour grew by 2% a year on average.
But since 2010 it has grown by an average of just 0.4% a year.
This productivity growth slowdown is not unique to the UK. It has been a feature of most advanced countries since 2010.
However, the UK’s slowdown has been relatively large.
In the period 2010 to 2023, the UK’s average annual growth rate fell by an average of 1.9 percentage points relative to the growth rate in the period 1971 to 2009.
This was worse than the rest of the G7 group of industrialised nations, apart from Germany and Japan.
Why has UK productivity growth been so weak?
For many years after 2010, economists treated the UK’s productivity slowdown as a puzzle, because there was no consensus on the cause.
Some pointed to the lasting and outsize impact of the financial crisis on the UK, given our economy’s reliance on financial services through the City of London.
Others suggested the austerity era spending cuts and tax rises of the last Conservative-led government had contributed to it by reducing overall economic activity at a time when the UK had the potential to grow more quickly without generating inflation.
More recently, Brexit has been cited as a contributor – both due to the reduction in trade relative to the UK staying in the EU’s single market and customs union since 2020 and also the damage to business investment from the long period of uncertainty about the UK’s future status in the years after the 2016 referendum.
There is still no consensus on the reasons for the productivity slowdown, though many economists think historically low levels of investment in the UK economy – both from the private sector and government – are likely to be an important part of the story.
Should this latest productivity downgrade come as a surprise?
Not really, because in its most recent forecast the OBR was notably more optimistic about UK productivity growth than other UK forecasters, including the Bank of England and the International Monetary Fund (IMF).
In March, the OBR was projecting medium-term potential supply growth for the UK (a wider measure of productivity, which includes increases in the available workforce) of 1.79%, versus the Bank of England’s 1.5% and the IMF’s 1.36%.
And the OBR has been persistently optimistic about UK productivity growth since 2010.
Given that, it is not surprising that the OBR has downgraded its forecasts to be more in line with other forecasters.
Public finance experts note that if Rachel Reeves had given herself more headroom against her fiscal rules in March 2025 then she might not have needed to respond to this downgrade by raising taxes.
Many public finance experts cautioned after her last Budget in October 2024 that if productivity growth disappointed, her plans and pledges not to raise taxes again looked vulnerable.
