UK fiscal productivity forecasts under siege

Raunaq Mohammad

3rd March 2025

Written by Raunaq Mohammad

Rachel Reeves is preparing to take action to rein in the UK’s budget deficit in March. But a wider economic shadow looming over the public finances could force the chancellor into even deeper cuts in the coming year.

The Office for Budget Responsibility (OBR) has long predicted that a sharp and sustained rebound in productivity is around the corner. David Miles, an economics professor who sits on the official forecaster’s top committee has said higher productivity is “the almost pain-free route to fiscal sustainability”.

Labour productivity or output per hour worked shrunk by 2,4% in the third quarter of 2024 from a year earlier according to indicative official data incorporating new population numbers.

In the US, business labour productivity rose by an annual rate of 2,1% in the three months leading up to September. This was also the fifth consecutive quarter of a rate above 2%.

Ben Navarro, UK economist at Investment Bank Citigroup, said that a reduction of just 0.1 percentage points in the OBR’s potential productivity growth forecast would create a hole of £7bn-£8bn in the public finances.

After the financial crash, the OBR assumed potential productivity growth would rebound to its pre-crisis rate of more than 2% a year. But it has been forced to pare back those estimates as data continues to disappoint.

Recent data has if anything worsened the picture. BoE governor Andrew Bailey, this month noted that the latest revisions to official figures showed the UK population and workforce had grown faster than previously thought.