Chancellor Rachel Reeves faces a potential £20bn budget shortfall after the Office for Budget Responsibility (OBR) prepares to downgrade economic forecasts. The Treasury watchdog’s revised outlook could force difficult tax rises or spending cuts ahead of the autumn budget.
Reeves has repeatedly vowed to stick to her strict fiscal rules, even as economic pressures mount. However, weaker productivity growth and lower migration numbers may shrink projected revenues, leaving her with limited options.
The OBR has begun its annual review of the UK’s economic health, focusing on productivity trends. Insiders suggest the watchdog now believes its past estimates were too optimistic. If adjusted, growth forecasts could drop sharply, widening the £20bn budget shortfall.
Oxford Economics warns that aligning productivity projections with independent forecasts could slash GDP estimates by 1.4% over five years. Such a revision would leave Reeves scrambling to fill the gap without breaking her fiscal commitments.
To close the £20bn budget shortfall, Reeves may need drastic measures equivalent to a 2p income tax rise or deep public spending reductions. Even a moderate adjustment could still require £12bn in savings, squeezing an already tight budget.
Former OBR official Andy King noted the Treasury’s unease, stating, “The OBR is more optimistic than other forecasters—that gap will likely close, and not in the government’s favor.”
The Treasury argues that infrastructure investments will eventually boost productivity. Yet critics say these policies won’t offset immediate fiscal pressures. James Smith of ING warned, “Downgraded growth and migration forecasts mean tax rises are almost inevitable.”
Adrian Pabst of NIESR criticized the cycle of speculation, saying, “Fiscal rules force the OBR into constant revisions, creating instability.” Meanwhile, Reeves insists her rules are “non-negotiable,” but the £20bn budget shortfall may test that resolve. With the OBR’s next report due in July, all eyes are on whether the chancellor will bend or break her promises to balance the books.
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