Rachel Reeves could be facing a larger-than-expected black hole in the nation’s finances as she prepares for next month’s Budget amid reports that the fiscal watchdog could be about to downgrade the UK’s productivity performance.
The BBC reported on Tuesday that the Office for Budget Responsibility (OBR) is expected to downgrade the UK’s performance on productivity, with fears that it could represent a further £20bn gap in the public finances.
This followed revelations by The Independent in September that the chancellor was bracing herself for bad news on productivity which in turns hits economic growth.
It comes less than a month before the chancellor’s Budget, due on 26 November, with the OBR set to deliver their final draft forecast in the coming days.
But Ms Reeves has doubled down on blaming Brexit for the country’s economic woes as she was pushed on the latest news this morning on a trip to Saudi Arabia.
“There are obviously huge benefits from rebuilding some of those relations, but also inflation is too high,” she told the Future Investment Initiative in Riyadh.
“One of the reasons for that is that there’s too much cost associated with trade with our nearest neighbours and trading partners.”
The chancellor is faced with the prospects of tax rises or spending cuts to fill the existing £40bn gap, as well as an additional £10bn of headroom to help the country brace for any further economic shocks.
Speculation is mounting about what measures Ms Reeves could introduce at the Budget, with changes to income tax and property tax thought to be among the ideas on the table, but the Treasury will not be drawn on what is up for consideration.
A Treasury spokesperson said: “We won’t comment on speculation ahead of the OBR’s forecast, which will be published on 26 November.”
On Monday, Ms Reeves signalled that tax rises are being considered ahead of the Budget, as the government needs to make sure there is “sufficient headroom” above its spending plans, and that its fiscal rules are met.
Speaking while on a trip to Saudi Arabia on Monday, the chancellor did not rule out the possibility of tax rises when asked if they were being considered as part of the Budget.
“The underpinning for economic growth is stability, and I’m not going to break the fiscal rules that we’ve set,” she said.
She added: “We are going to reduce that primary deficit, we are going to see debt starting to fall as a share of GDP, because we need more sustainable public finances, especially in the uncertain world in which we live today.
“So growth will be a big part of that Budget story, in a way that, frankly, I think growth has been neglected as a tool of fiscal policy in the last few years.
“But we are looking, of course, at tax and spending to ensure that we both have resilience against future shocks by ensuring we’ve got sufficient headroom, and also just ensuring that those fiscal rules are adhered to.”
A senior source told The Independent in September at the time that “the OBR will make it clear that this revision has nothing to do with any of the measures brought in by this government”.
Tax rises are expected to be announced during the fiscal event at the end of next month, as the chancellor looks to balance the books.
One measure thought to be under consideration is a mansion tax on properties worth over £2m, but Ms Reeves has been warned that such a levy would not be enough to fill the gap.
Former Institute for Fiscal Studies director Paul Johnson told The Independent that the government should reform property taxes more widely so that council tax is proportional to the current value of a property, while also scrapping stamp duty.
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