Britain’s productivity forecast is expected to be downgraded sparking further fears of tax rises in the Chancellor’s upcoming budget.
Treasury officials are anticipating that the blackhole in the UK’s finances could amount to up to £30billion by the time Rachel Reeves lays out her economic plans on November 26.
An expected downgrade in key productivity forecast by the Office for Budget Responsibility (OBR) is expected to make up a large portion of the gap.
This could mean Ms Reeves would have to break her own fiscal rules without significant action in the budget.
Ms Reeves is expected to pin the blame on the previous Conservative government for the likely downgrade, arguing that the Treasury’s independent watchdog was giving a “historical” verdict on the Tory administration from 2010 to 2024.
A Treasury official told the Financial Times: “The untold story of this Budget is the historical legacy of the Conservatives that nobody knew about.
“The OBR productivity downgrade could amount to half or three-quarters of the fiscal hole.
“This doesn’t reflect on what’s happened since the election, but we are the ones picking up the bill.”
Labour made a manifesto pledge not to increase taxes on “working people” and the Chancellor has previously insisted she would not raise income tax, VAT or national insurance, which are the biggest tax levers available to her.
But the OBR downgrade could force her to change tack or she will have to look to raise significant amounts of cash elsewhere.
It comes after the Government rolled back cuts to benefits, welfare and winter fuel payments for pensioners after a rebellion by backbench MPs.
This caused a £6billion shortfall in Britain’s finances.
If UK borrowing costs jump back to the highs reached early this month, it could knock several billion pounds more off the Chancellor’s room for manoeuvre in her fiscal plans.
Shadow chancellor Sir Mel Stride said: “Every time the numbers don’t add up, Rachel Reeves blames someone else. But the truth is the markets are losing confidence.”
It comes as UK inflation remained unchanged but food and drink price rises have accelerated for the fifth month in a row, new official figures show.
The rate of Consumer Prices Index (CPI) was 3.8% in August, the same as July, the Office for National Statistics (ONS) said on Wednesday.
This was the level that most economists had been expecting for the month, and it means overall inflation remains elevated above the UK's 2% target rate.
Lucy Powell, one of the two candidates in the race to replace Angela Rayner as the Labour deputy leader, said the party’s "mistakes" in Government have given voters the impression that the party is "not on the side of ordinary people".
Asked if the Government has been "looking as if they were on the wrong side" with decisions like limiting the winter fuel payment and raising taxes, Ms Powell told the BBC: "I think part of what's gone wrong is that people have lost sense of what those values are and whose side we are governing.
"When you look at our many achievements and the many things that we have been doing, whether that's getting the waiting list down, or more NHS appointments, or some of the legislation that we brought in the Employment Rights Bill, or the renationalisation or the public ownership of railways - we're taking on the vested interests in service of the many.
"But yes, some of the mistakes that we've made, or some of the unforced errors, have given a sense that we're not on the side of ordinary people."
