The true size of the Chancellor’s fiscal black hole is still unknown, but the OBR is on course to deliver a damning blow.
Rachel Reeves’ economic nightmare is set to get much worse in November, as it’s now expected that official forecasters are on course to deliver a fresh £20 billion blow. Last month it was revealed that the Office for Budget Responsibility had concluded its forecasts about Britain’s productivity rate over the coming years were too optimistic, and would have to be downgraded at the coming Budget.
However every reduction in expected productivity growth of just 0.1% would cost the Chancellor a whopping £9 billion, on top of the other money she needs to raise by November. This morning a top economist has forecast it’s likely the OBR will downgrade expected productivity by even more, requiring Rachel Reeves to find between £15 and £20 billion more in her Budget to balance the books.
Andrew Goodwin, chief UK economist at Oxford Economics, said: “They’re almost certainly going to downgrade it. [Some] £15bn to £20bn is a reasonable ballpark.
Ms Reeves is facing a productivity crisis (Image: Getty)
Ms Reeves is set to hike taxes even further in November (Image: Getty)
“The motivation for doing so is that they are the most optimistic forecaster in the consensus. If your role is to be the sober judge of economic policy, then you can’t be the most optimistic forecaster.”
Matt Swannell from EY added: “The OBR will likely curtail the rise in its medium-term productivity growth forecast that had been a feature of its recent projections.
“It seems likely that productivity growth could now rise to just under 1pc per year, which is broadly comparable to the IMF and Bank of England’s latest forecasts, rather than picking up to around 1.25pc. On its own, this could reduce headroom by just under £20bn.”
This blow would come on top of the billions more in tax rises she is expected to announce.
It’s widely believed Ms Reeves faces a fiscal blackhole of £35 and £40 billion, which Britons have been warned will see their taxes go up even further.
After winning the election last year, Ms Reeves immediately broke her manifesto pledge to not increase National Insurance, but promised it was a ‘one-off’ to fix the mess left behind by the Conservatives.
However a number of prominent u-turns on both welfare cuts and Winter Fuel cuts have left her trying to find £10 billion more.
Reductions in economic growth, and an expected announcement about scrapping the two-child benefit cap, will add further pressure on Ms Reeves to hike taxes.
At Labour’s party conference earlier this week, Ms Reeves stared down her left-wing opponents, insisting that she will not deviate from her fiscal rules and warning that doing so would result in a Liz Truss-style economic meltdown.
However she faces intense pressure to do so from the Labour left, including Manchester Mayor and leadership agitator Andy Burnham.
While she eventually claimed she would still with her election pledge not to raise National Insurance, VAT or Income Tax, she appeared to open up the possibly of rowing back on other commitments.
She warned: “I think everyone can see in the last year that the world has changed, and we’re not immune to that change.
“Whether it is wars in Europe and the Middle East, whether it is increased barriers to trade because of tariffs coming from the United States, whether it is the global cost of borrowing, we’re not immune to any of those things.
“It’s very important that we maintain those commitments to economic stability because we rely on people to buy Government debt to be able to finance the things that we’re doing as a country. I wish it wasn’t so, but I am Chancellor in the world as it is, not the world that I might wish it to be.”