The Treasury’s official forecaster has become more pessimistic about the productive potential of the UK economy, a judgement that is likely to weaken the outlook for the public finances at the November Budget.
The bad news is also expected to be used by Philip Hammond as a reason why he cannot loosen the Government’s purse strings, despite widespread calls for extra spending on public sector pay and the NHS.
In its latest Forecast Evaluation Report the Office for Budget Responsibility on Tuesday said: “We anticipate significantly reducing our assumption for potential productivity growth over the next five years.”
“Other things being equal a downward revision to prospective productivity growth would weaken the medium-term outlook for the public finances.”
Treasury sources have indicated that they expect the £27bn of headroom that the OBR gave the Chancellor, Mr Hammond, against his own fiscal rule for 2020-21 to be more than halved in the Budget.
In response to the OBR report, the Treasury stressed state capital investment plans.
“Productivity has been a longstanding challenge for the UK economy, which is why we are focussed on boosting our performance to deliver higher living standards and build an economy that works for everyone. This includes £23bn of investment in infrastructure, research and housing, and an ambitious Industrial Strategy to boost productivity across every region,” a spokesperson said.
But Frances O’Grady of the TUC said productivity downgrades were the Government’s own fault.
“Britain’s productivity headache is a self-inflicted wound. Years of cuts, low public investment, and rising job insecurity have taken a heavy toll,” she said.