Here’s a stark reality: the UK’s productivity slump could force Chancellor Rachel Reeves to break her promise of no tax hikes for working people. But here’s where it gets controversial—is this a failure of economic policy, or an unavoidable consequence of deeper structural issues? Let’s dive in.
Chancellor Rachel Reeves is gearing up for her Budget announcement on 26 November, and tax increases are on the table. Why? Because the Office for Budget Responsibility (OBR), the government’s official forecaster, is set to slash its predictions for UK productivity growth in the coming years. And this is the part most people miss—lower productivity doesn’t just mean slower economic growth; it directly threatens the government’s ability to balance its books without raising taxes.
What Exactly is Productivity?
Productivity measures how much the UK economy produces per hour of work, often called 'output per hour.' Think of it as a report card for how efficiently a country uses its workforce and resources. Higher productivity typically means higher wages and living standards. For instance, if a factory produces more cars in less time, it’s a sign of improved productivity, which can lead to better pay for workers.
In March 2025, the OBR predicted UK productivity would grow by around 1% annually over the next five years. But if productivity stalls, so does GDP growth—and with it, tax revenues. The Institute for Fiscal Studies (IFS) warns that every 0.1 percentage point drop in productivity growth could force the government to borrow an extra £7 billion by 2029–30. That’s the year the government aims to balance day-to-day spending with tax revenues, avoiding borrowing except for investments.
Here’s the crunch: if the OBR cuts its productivity forecast from 1% to 0.8%, the government’s projected borrowing in 2029–30 would soar by £14 billion. In March, Chancellor Reeves gave herself a £9.9 billion 'headroom' to meet her borrowing targets. A £14 billion shortfall would wipe that out, leaving her with two unpalatable options: slash spending or raise taxes. With departmental budgets already locked in, tax hikes seem the likely choice.
The Long-Term Productivity Puzzle
The UK’s productivity woes aren’t new. Since the 2008 financial crisis, growth has been sluggish. Between 1971 and 2009, productivity rose by 2% annually, but since 2010, it’s averaged just 0.4%. While other advanced nations have faced similar slowdowns, the UK’s decline is among the sharpest in the G7, outpaced only by Germany and Japan.
Economists have debated the causes for years. Some blame the lingering impact of the financial crisis, given the UK’s reliance on financial services. Others point to austerity measures under the previous Conservative government, which may have stifled growth. More recently, Brexit has been cited as a culprit, reducing trade and deterring investment due to years of uncertainty.
Here’s a bold question: Could Brexit be the elephant in the room? While no single factor explains the productivity slump, many economists argue that chronically low investment—both public and private—plays a key role. But Brexit’s trade barriers and uncertainty have undoubtedly added fuel to the fire.
Should We Be Surprised?
Not really. The OBR’s March forecast was rosier than those of the Bank of England or the International Monetary Fund (IMF). While the OBR predicted 1.79% medium-term productivity growth, the Bank of England and IMF projected 1.5% and 1.36%, respectively. The OBR’s latest downgrade simply brings it closer to the consensus.
Public finance experts argue that if Chancellor Reeves had built in more headroom in March 2025, she might have avoided tax hikes now. After her October 2024 Budget, many warned that her no-tax-rise pledge looked shaky if productivity faltered. Was this a gamble that backfired, or an unavoidable consequence of global economic trends?
The Bigger Picture
This isn’t just about numbers—it’s about people. Lower productivity means slower wage growth, fewer public services, and tougher choices for policymakers. If tax rises are inevitable, who should bear the burden? And could this be a wake-up call to address the UK’s long-term economic challenges?
What do you think? Are tax hikes the right response to the productivity crisis, or should the government focus on boosting investment and growth? Let’s debate this in the comments—your voice matters!
