Navigating in the fog: Why the OBR should hold its nerve on the productivity forecast

Productivity growth is central to the UK economy. Higher productivity allows the UK to produce more output without increasing its inputs (eg an employee produces more for each hour worked). This is critical for sustainable economic growth, and the quiet driver of living standards, competitiveness, and the health of the public finances. 

In the UK’s current situation, the forecast for productivity growth up to 2029/30 is also a make-or-break factor for meeting the chancellor’s fiscal rules. One of her main targets is for the current budget – day-to-day spending minus tax receipts – to be in balance by 2029/30. This aims that the government spends less in day-to-day expenditures (such as salaries of the police) than it receives in taxes. Lower productivity would mean that the UK economy produces less – which means less to tax – and makes it harder for the chancellor to meet this commitment without raising tax or reducing spending elsewhere. Of course, we do not know what productivity growth will be up to 2029/30. It thus falls on the Office for Budget Responsibility (OBR) to produce a forecast against which the chancellor’s fiscal rules are evaluated. 

A host of economists have put pressure on the OBR to cut its productivity forecast when it updates its outlook this autumn citing years of weak performance. The fiscal pressures from this could be significant: from no impact to an austerity-beating £44 billion shortfall in public finances. All from the change of a highly uncertain forecast. Given the severe fiscal consequences of such a change, the evidence base for it should be strong.  

But a close look at productivity data and forecasts suggest the OBR should hold its nerve. There are three reasons for this: Firstly, the latest ONS data is in line with the OBR’s expectations (rather than confounding them). Secondly, the Bank of England (BoE) – which had a weaker productivity forecast than the OBR (and prompted some to urge the OBR to align with it) – upgraded its own productivity forecast. It is now very close to that of the OBR. It is true that the OBR’s forecast has often proved optimistic, but this was partially during a period of low investment, austerity, and the ongoing economic disruptions following the Covid pandemic. 

Finally, there is remarkable ongoing uncertainty around recent productivity data and the economy’s recovery profile. Before the pandemic, annual productivity growth was typically revised by around +/- 0.6ppts three years after the first estimate, and this uncertainty has likely increased post pandemic. Moreover, there are potential upside risks to productivity from a raft of newly announced government policies, such as the wide-ranging industrial policy. 

Given these three points, our judgement is that marking down the productivity forecast now would be premature. It would trigger damaging fiscal tightening – with significant economic and social consequences as well as lower growth – without being based on a water-tight evidence base. 

The latest data is in line with OBR expectations – and the BoE now expects a stronger recovery

This piece investigates whether the current evidence based justifies changing the OBR’s published productivity path before the autumn budget. This section starts with the most recent data releases and the BoE’s widely respected forecast. 

Whilst the ONS’s provisional Q2 2025 data shows a sharp decline in output per hour -0.8 per cent compared to a year earlier, recent non-provisional data is exactly in linethe OBR’s March 2025 forecast path. Given the tendency for significant revisions to this dataset, the most recent data thus does not give an immediate impetus to change the forecast. 

Secondly, the BoE’s productivity was previously noticeably weaker than that of the OBR. This led to many calling for the OBR to downgrade. However, in its August 2025 Monetary Policy Report the bank upgraded its potential productivity forecast in output per worker terms, as well as judging that recent “potential productivity growth… [has] been somewhat less weak”. When adjusted for hours worked to match the OBR’s output per hour measure, the bank is in line with where the OBR was in spring – only about 0.1 percentage points lower throughout the forecast.

Although exact comparisons between OBR and BoE data are challenging due to measurement differences, it is clear that there is no major disagreement in productivity growth between the two institutions – as figure 1 shows.

There is exceptional uncertainty in the outlook for productivity growth – and the OBR should wait for this to resolve 

ONS productivity figures are one of the noisiest datasets in the economic calendar. In fact, the ONS is clear that “users should expect revisions to productivity data that affect the back series”. These statistics are badged ‘official statistics in development’ by the UK Statistics Authority - meaning “in the testing phase and not yet fully developed”. The ONS warns that data with this badge may have a higher degree of uncertainty. 

Initial quarterly estimates are also based on incomplete information and are frequently revised as fuller GDP and labour market data arrive. This means short-term movements can be misleading. A weak couple of quarters may vanish on revision – or conversely, strong growth may be marked down. 

Before the pandemic, annual productivity growth was typically revised by around +/- 0.6ppts three years after the first estimate (2002 Q2 to 2016 Q3 - largest comparable series available). This means – for example – that flat growth first recorded for 2023 could actually be moderate growth (+0.6 per cent), or an even sharper decline (-0.6 per cent) by the time of next year’s release. 

If anything, this uncertainty has increased post-pandemic – with 0 per cent annual growth recorded in 2023 already revised down to -0.4 per cent. Since hours worked are a key input into productivity data, this uncertainty is partly related to the ongoing issues and development of the UK’s labour market statistics – with the Labour Force Survey (LFS) suspended in 2023 due to falling response rates, and the ONS planning further changes to the LFS over 2026.

The outlook for productivity growth is also highly dependent on the government’s own pro-growth policy and strategy. Many announced policies will have significant impacts on productivity but have not yet been assessed by the OBR as details remain unclear – this includes planning and infrastructure reform, industrial strategy and long-term housing strategy. There is also debate over the best way for the OBR to assess these investments, and we argue that returns are likely underestimated under the current approach. Moreover, public investment is now at its highest sustained rate since the 1980s, giving realistic cause for optimism – as could the implementation of the government’s industrial strategy. 

The fiscal stakes: what a downgrade would mean

The chancellor’s primary fiscal mandate is to have the current budget – day-to-day spending versus receipts – in balance by 2029/30. Slower productivity feeds straight through to that target and has a powerful multiplier effect on the public finances. Lower productivity means:

• wages would be forecast to grow more slowly, leading to weaker income tax and NICs
• profits would be smaller, leading to less corporation tax
• household spending would be weaker, leading to lower VAT
• the benefits bill wouldn’t fall as fast relative to GDP. 

The OBR’s own scenarios show the scale of these impacts. In March 2025, moving from the central productivity path to the ‘low productivity’ path (-0.7ppts on average over the forecast window) worsened the current budget by about £61 billion by 2029/30. Scaling this, we can examine how any changes to the trend productivity will impact the chancellor’s fiscal rules – and by extension, how much of a fiscal consolidation meeting this rule would imply.

Figure 2 shows that the budget balance in 2029/30 is extremely sensitive to changes in the productivity forecast. With headroom against the fiscal rules already tight, even a modest downward revision could push the chancellor into the red in 2029/30 – forcing either tax rises, deeper spending cuts, or a rule-breach. A 0.5ppts downgrade would imply around a £44 billion fiscal contraction in the autumn budget – comparable to George Osborne’s emergency 2010 budget following the financial crisis, at around £40 billion a year. 

The OBR should hold the line 

Given the severe fiscal consequences of changes in productivity forecast, the OBR’s decision could force the single largest change in the current government’s fiscal plans. As such, the evidence base for such a change should thus be high. Right now, the evidence argues for stability amongst high uncertainty: recent data matches expectations, the BoE’s outlook has strengthened, and productivity figures are too volatile to treat short-term dips as permanent – particularly the preliminary 2025 Q2 data introduced today.

Making permanent changes to the OBR’s productivity forecast now would risk locking in an assessment made with incomplete information. This could strip billions from the chancellor’s headroom, risk triggering avoidable tax rises or spending cuts, and lower growth as a result.

Productivity statistics are still branded ‘in development’. We expect significant changes to labour market data over the next year, and productivity-enhancing policies are yet to be assessed. The smart move in autumn is to hold the forecast steady and wait for a clearer picture of the UK economy to evolve.