Productivity downgrade may add £20bn to Budget hole

The chancellor is facing a larger-than-expected gap in initial Budget numbers as a result of long-running poor productivity in the UK economy.

The downgrade to productivity performance from the government's official forecaster could lead to a £20bn gap in the public finances on its own, the BBC understands.

The Office for Budget Responsibility (OBR) will deliver its final draft forecast, showing the output of the economy per hour worked, to the Treasury on Friday.

The Treasury declined to comment on "speculation" ahead of the OBR's final forecast, which will be published on 26 November.

It comes as speculation is growing over what choices Chancellor Rachel Reeves will take for tax and spending in the run up to her Autumn Budget.

The OBR previously assumed a partial bounce back in productivity growth, but it has never materialised.

This productivity assumption is essential to long-term growth prospects and so, under the current system, even a fraction of a percentage point change can alter how much money a Budget needs to raise by several billion pounds.

The OBR is understood to have downgraded this by 0.3 percentage points - a figure first reported by the Financial Times - bringing its assumption closer to that of the Bank of England.

The Institute for Fiscal Studies think-tank has calculated that for every 0.1 percentage point downgrade in the productivity forecast, public sector net borrowing would increase by £7bn in 2029-30 - meaning a 0.3 point cut could add £21bn to the Budget hole.

The changes open up an initial gap of some £20bn, rather than the £10-£14bn widely anticipated.

Such a hole could be plugged by hiking taxes, reducing public spending or increasing government borrowing.

Reeves admitted on Monday to business leaders in Saudi Arabia that the OBR was "likely to downgrade productivity" which has been "very poor since the financial crisis and Brexit".

The OBR is expected to explain the decision in detail, but some ministers have privately pointed out that if it had done this earlier, different choices could have been made at this summer's Spending Review.

There are many other moving parts in the Budget which may lean in the other direction, such as the decline in the interest rates paid on government debt.

However, with other pressures such as the U-turns on welfare spending and a desire to rebuild a bigger buffer in the public finances, speculation is pointing towards significant tax rises including some possible breaches of manifesto commitments, points towards significant tax rises, including possible breaches of manifesto commitments like income tax.

The Treasury will inform the OBR of its first draft Budget measures next week.