Why does falling productivity in the UK mean rising taxes are better?

Chancellor Rachel Reeves is considering a tax hike in her budget on 26 November.

And he said one of the main reasons is that the government’s official forecaster, the office for budget responsibility (OBR), has lowered the UK’s growth rate in the coming years.

So why would lowering productivity gains in the UK lead to tax rises?

And this is something the government was expecting before it promised not to raise taxes on the working people in the 2024 election reveal?

VBC Verify looks at the statistics.

Productivity is the amount of goods and services produced by the whole UK economy for each hour of work carried out by each person in the working population, also known as “output per hour”.

It gives an indication of how efficiently a country’s economy uses its workers and equipment to produce these goods and services – and how productive a country is.

A country with a higher level of productivity always has a higher average wage and income.

In the spring statement in March 2025 The OBR expects overall UK productivity will grow around 1% per year for the next five years.

If productivity is slower it means overall GDP growth – and overall tax revenue – will be lower than previously expected.

The institute for fiscal studies (if) thinks that the tank is estimated Every 0.1 percentage point downgrade in the official productivity growth forecast increases enhanced government borrowing by £7bn in 2029-30.

That’s the year that the government’s selective borrowing rules require it to balance daily spending with tax revenues, which can’t lend anything but investment.

So if the OBR lowers its forecast for average productivity growth in the UK over the next five years from 1% to 0.8.2 percentage points) that the change will change again in 2029-30 by £14bn.

In March, the Chancellor gave himself “headroom” against meeting his borrowing rules in 2029-30 by just £9.9bn. In other words, it is the path between meeting and not meeting his rules.

That means an Obr Productivity Forectived Downgrade of 0.2 percentage points (£14bn) which would, in itself, wipe out this headroom, pushing the government into an expected deficit for the year.

And if the Chancellor wants to restore headroom against his rules he will have to cut government spending or raise taxes by an equivalent amount.

Given the departmental spending budgets set for review in June, the Chancellor is expected to try to restore his headroom through his fiscal rules by raising taxes.

Productivity growth in the UK has not weakened significantly since the financial crisis.

Between 1971 and 2009, UK output grew by 2% a year on average.

But since 2010 it has been growing at an average of 0.4% a year.

This productivity growth increase is not unique to the UK. It has been a part of most developed countries since 2010.

However, the slowdown in the UK is quite large.

In the period 2010 to 2023, the average annual growth in the UK fell by an average of 1.9 percentage points relative to the growth rate of the period 1971 to 2009.

This is worse than the rest of the G7 group of industrialized countries, except for Germany and Japan.

For several years after 2010, Economists treat the UK’s productivity recovery as a puzzlebecause there is no consensus on the cause.

Some pointed to the lasting and outhjizing effect of the financial crisis in the UK, given the economic dependence on financial services in the city of London.

Some suggest that the Austerity Era spending and tax hikes of the last conservative government contributed to this by reducing the growth rate that made it more prone to inflation.

More recently, Brexit has been cited as a contributor – due to the decline in trade in UP relative to the uncertainty about the future situation in the coming years in the year after the 2016 referendum.

There is no agreement on the factors to improve productivity, Yet many economists think so 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.

Not really, because in its latest forecast the Obr is more optimistic about UK productivity growth than other UK forecasters, including the Bank of England and the INTery Monetary Fund (IMF).

In March, the OBR was ahead of the medium-term potential growth of the supply chain for the UK (a much more available at 1.79%, against the Bank of England’s 1.5% and the 1.36% of the IMF.

and Obr is always optimistic share of UK productivity growth since 2010.

Given that, it is not surprising that the OBR downplays those seen as more in line with other forecasters.

Public finance experts remember that if Rachel Reeves gave herself more headroom against her fiscal rules in March 2025 then it may not be necessary to respond to this development by raising taxes by raising taxes.

Many public finance experts have warned After his last budget in October 2024 that if austerity disappointed, his plans and promises not to raise taxes also look weak.