Rachel Reeves has been dealt a blow by the Budget watchdog as it slashes estimates on a key economic indicator for the UK, raising fears the chancellor will need to hike taxes.
On the eve of the Labour Party conference in Liverpool, The Independent can reveal that the chancellor has been told the Office for Budget Responsibility (OBR) will substantially reduce its estimates for productivity in the economy – which will lead to even lower economic growth.
It means Ms Reeves will need to find even more money to balance the books, just weeks before her crucial Budget in November, putting further strain on the manifesto commitment not to raise one of the three big taxes – income tax, VAT or national insurance contributions from employees.
She will also be left with a Budget deficit in 2030 which, economists warn, mean she has to raise taxes even higher than previously thought.
The chancellor is pushing for the OBR to pin the blame on 14 years of Conservative government and previously “over optimistic” estimates by the body, in a bid to reduce the political damage.
The OBR has been under pressure to ensure it is clear that none of Ms Reeves’s measures in government – including £30bn of tax rises in the last Budget – are to blame for its revision downwards for productivity.
A senior source told The Independent: “The OBR will make it clear that the revision has nothing to do with any of the measures brought in by this government.”
The chancellor is already struggling to fill a £40bn black hole and sources close to Ms Reeves have admitted the political impact of the renewed forecast ahead of her Budget “will be deeply unhelpful” and that she is braced for an onslaught from the opposition parties.
However, they noted: “Really, the OBR has been having a higher estimate on productivity than everyone else for years which is why they decided to review their measurement.
“If anything, the problem was the Tories [in government] never meeting the level the OBR expected before.”
The Tories claim she “only has herself to blame” – pointing to indicators from the Bank of England that businesses have lost confidence and investment is stalling.
Economic productivity is the measure of how efficiently resources are used to produce goods and services (outputs) and is a key driver of economic growth, higher incomes and improved living standards.
The number is being downgraded because the UK has always failed to meet the economic productivity figures estimated in recent years by the OBR.
Professor Stephen Millard, deputy director of the influential National Institute of Economic and Social Research (NIESR), agreed Ms Reeves could not be blamed for the downgrade.
But he warned: "The revision does mean that, without any policy change, the OBR will now be forecasting a current Budget deficit in five years’ time. So the chancellor will have to raise taxes to close the gap.
“And the gap is going to be higher than it would have been absent the downward revision.”
Recently, Ms Reeves admitted publicly that “the economy is not working well enough”. She was already under pressure to break the manifesto commitment and hike income tax or to bring in a series of wealth taxes.
With Andy Burnham openly looking at replacing Sir Keir Starmer as leader, and Labour lagging up to 10 points behind Nigel Farage and Reform UK, Ms Reeves needs to be able to turn economic indicators around to give the government a boost.
However, the productivity downgrade comes after the downward revision on economic growth by the Organisation for Economic Cooperation and Development.
Political opponents believe Ms Reeves’s spending hikes without asking for efficiency savings as well as tax rises have made the situation much worse.
Shadow chancellor Sir Mel Stride said: “If the OBR downgrades productivity, the chancellor only has herself to blame. A downgrade won’t be because of the past, but because of the damage Rachel Reeves is doing to Britain’s future.
“Business investment is stalling, work is being taxed more heavily, and economic confidence is draining away – all under Rachel Reeves's watch.”
He added: “This is all a direct consequence of Labour’s decision to raise taxes on jobs and abandon pro-growth reform. Instead of taking responsibility, the chancellor is already reaching for her usual excuse: blame everyone else.
“But the numbers don’t lie – this is Labour’s mess.”
Leading economists who have been highly critical of Ms Reeves's tenure in the Treasury have come down on her side over the long-term problem with productivity.
But they warned she has not done enough to change the trend on productivity.
Former Treasury minister and Goldman Sachs chief Jim O’Neill, who was brought in as an adviser to Ms Reeves while she was in opposition, said: “Given that the economy has done better than consensus forecasters so far in 2025, I don't think you can really blame current government.
“That said, they haven't done enough with their framework to boost public investment spending to get OBR to boost offsets to the OBR’s previous over enthusiasm.”
Shanker Singham, chair of the Growth Commission, warned the UK economy “needs a reset”.
He said: “I think all governments going back 30 years or so take responsibility. It is clear that, in that period, economic growth in the UK and the G7 more widely, with the exception of the US, has been anaemic. These countries seem to be hell bent on doing all the things that damage economic growth, while simultaneously paying lip service to it.”
He warned: “We have regulated the price of energy upwards and we have made labour markets less flexible which is a major driver of GDP per capita growth.
“In the UK, we have persistently failed to take an axe to planning regulations which have tied developers up so nothing can be built. Now we are looking at nationalising services instead of making the privatisation that did take place work better by introducing competition.”
Ms Reeves, who was in Southport on Saturday unveiling investment in the North, has announced a series of major projects recently including a second runway at Gatwick airport and changes to the planning laws to try to bring economic growth.
The Treasury has said it will not comment on “speculation” about the OBR’s forecasts.
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