Private warning from the UK’s fiscal watchdog could shrink headroom by at least £9bn, forcing tough calls ahead of the 26 November Budget

LONDON — UK chancellor Rachel Reeves has been privately warned by the Office for Budget Responsibility (OBR) that its estimates for future productivity growth are likely to be revised down ahead of the Autumn Budget on 26 November, a shift that could weaken the public finances by at least £9bn and potentially far more. According to people familiar with the forecasting process, the OBR’s medium‑term productivity assumption — a key driver of tax receipts, debt dynamics and the Treasury’s fiscal rules — is now expected to be marked lower, narrowing the fiscal headroom Reeves had preserved for her first budget.

The timing is awkward. Reeves entered the Treasury pledging a ‘hard‑nosed’ fiscal framework designed to rebuild credibility after years of instability and the market turmoil of 2022. She has largely resisted calls to spray new money at public services, keeping roughly £10bn of space against her main rule to balance day‑to‑day spending by 2029/30. A downgrade to productivity would, before any policy decisions, erode that buffer — potentially pushing the government close to, or even through, the guardrails she has set.

Why productivity matters so much: in the OBR’s model, small changes in the trend rate compound across the economy. A tenth or two‑tenths of a percentage point lower productivity growth each year translates into a smaller tax base and higher debt‑interest burdens relative to GDP. Several private‑sector economists estimate that a 0.1–0.2 percentage point downgrade could cost the exchequer between £9bn and £18bn a year by the end of the forecast horizon — implying a sizable hole opening up just as ministers finalize the Budget.

Officials stress that the watchdog’s deliberations are ongoing and that the final numbers will only be locked shortly before the Budget is published. But the direction of travel has been evident for months. In July, the OBR acknowledged in a forecast evaluation report that, on average since 2010, it had been too optimistic on growth. Since then, a run of weaker‑than‑expected activity data has reinforced the case for caution. Treasury aides say Reeves has told colleagues she will not ‘game’ the rules to manufacture headroom.

Politics is never far away. Allies of the chancellor argue the roots of Britain’s productivity malaise pre‑date the new government — pointing to a decade of under‑investment, Brexit‑related frictions and a pandemic‑era collapse in public‑service efficiency. Opponents counter that Labour over‑promised in opposition and is now boxed in by self‑imposed constraints. Either way, the OBR’s revisions threaten to dominate the run‑up to November, testing the administration’s capacity to blend pro‑growth reform with fiscal restraint.

What options does Reeves have? Broadly three, none of them easy:

First, tax. The government has already ruled out increases to the main rates of income tax, National Insurance and VAT this Parliament, but there is scope to raise revenue by closing loopholes, broadening bases, and recalibrating reliefs. Options under active discussion in Whitehall include further curbs to non‑dom tax privileges, equalizing capital‑gains treatment where it is deemed overly generous, reassessing inheritance‑tax thresholds, tightening reliefs in the property sector and the treatment of carried interest, and re‑profiling windfall levies on energy profits. Each would be politically contentious and technically complex — and the Budget scorecard would likely need many such measures to add up.

Second, spending. The multi‑year settlements pencilled in by the last government were already tight. A productivity downgrade would make them tighter still unless offset elsewhere. Departments have been tasked with finding efficiencies via digitization, procurement reform and workforce planning, with the NHS singled out for improved throughput and a reduction in agency staffing. But most analysts warn that without real‑terms top‑ups, services face difficult trade‑offs after more than a decade of restraint.

Third, growth. Reeves has set out a programme to ‘crowd in’ investment: planning reform for housing and clean energy, a new National Wealth Fund, and a push to lower the cost of capital via stability and predictable rules. A credible growth plan would not fix the near‑term arithmetic, but it could strengthen the medium‑term narrative — and, if delivered, gradually ease the pressure on the public finances.

Markets will watch two numbers above all: the OBR’s new productivity assumption and the chancellor’s remaining headroom. Investors have demanded a higher premium to hold UK gilts than comparable G7 debt since 2022’s mini‑budget shock, making credibility paramount. Anything that smacks of creative accounting would risk pushing borrowing costs higher, compounding the very problem the Treasury is trying to solve.

On the politics of accountability, ministers have been at pains to champion the OBR’s independence even while bristling at its constraints. Some backbench voices have muttered that the watchdog is too gloomy, but Reeves is unlikely to pick a fight: the OBR’s imprimatur is a central plank of her fiscal reset. That makes adaptation, not argument, the more probable path.

There are, however, a few offsetting rays of light. Hospital productivity in England has rebounded this year as the NHS has increased same‑day discharges and cut reliance on agency staff. If sustained — a big ‘if’ — public‑service efficiency could improve faster than during the immediate post‑pandemic years. Business investment has also shown signs of stabilizing after a bruising period of cost shocks and policy churn.

Still, the arithmetic is unforgiving. Even before any new policy moves, the debt‑interest bill remains historically high; the working‑age benefits caseload has risen; and the triple lock continues to ratchet up the state pension. Against that backdrop, a thinner revenue stream from weaker productivity would reverberate across the scorecard — from health to defence, from schools to social care.

The Treasury will now conduct a frenetic, line‑by‑line scramble to assemble a credible package for November. Expect targeted tax changes, a renewed efficiency drive in departments, and a laser focus on unlocking private investment. The political choreography will be familiar: ministers blaming inheritance problems; the opposition decrying stealth taxes and squeezed services; and the watchdog calmly publishing its tables.

Beyond Westminster, the bigger question is whether the UK can escape its productivity trap. That will depend on the pace of housing and grid build‑out, the diffusion of AI and other frontier technologies through the long tail of small and mid‑sized firms, and a planning system capable of delivering big projects at speed. If the government can pair institutional stability with reform momentum, the outlook could improve. If not, lower trend growth will keep turning near‑term policy choices into zero‑sum politics.

For now, the message from the fiscal referee is stark: expect less growth, and plan accordingly. Reeves’ first budget was always going to be a test of priorities. A downgrade to productivity ups the difficulty setting — and narrows the room for error.