The UK economy’s productivity picture has radically changed in the last year. Maurício Alencar considers what this could mean for John Healey.
For weeks leading up to last year’s Budget, reports dripping from so-called Treasury sources insisted it was not Rachel Reeves’ fault that tax hikes worth billions of pounds were on the horizon. The blame lay with the Office for Budget Responsibility, as reports reflecting the then-Chancellor’s views said, for its brutal decision to downgrade trend productivity forecasts.
It was a problematic few weeks of briefing wars for Reeves. The Chancellor even admitted that forecasts privately issued by the small but powerful government body were “gloomy”, weeks before figures were put – or inadvertently leaked – to the public. The OBR’s downgrades were the main justification for the Chancellor’s unpopular decisions even as former OBR chiefs Sir Charlie Bean and Andy King told City AM that Reeves should have seen the heavy downgrade coming a mile away.
While the impact of the actual downgrade was not as bad as first feared, the OBR’s decision to change its productivity outlook was a seminal moment for Sir Keir Starmer’s government. It defined frontbenchers’ downbeat mood around the Budget, forced Reeves into another U-turn by extending a freeze on income thresholds, and put the Prime Minister on the back foot in his effort to shore up support among the electorate.
Less than a year after forecasts undermined Reeves, revisions by the Office for National Statistics to the UK’s productivity data have suggested that she may have been treated unfairly by the government’s fiscal watchdog. Chancellor John Healey is not expected to reap the benefits of changes to growth, although it could prompt City economists to take a more benign view of public finances this time round.
Deutsche Bank economist Sanjay Raja said there would be “more credibility” attached to “upside” scenarios on growth. Even if the OBR does not “open Pandora’s box”, Healey will likely have something to shout about in his Budget statement.
Reeves’ productivity battles
Things felt bleaker in 2025. In July of that year, over four months out from the Budget, the independent watchdog said it would be looking over its estimates for growth trends in the UK economy, sending chills through Westminster.
The OBR had by then been writing its assessment of public finances on the assumption that productivity, measured by output per hour worked, would grow at an average pace of 1.3 per cent each year.
As of November 2025, former OBR chair Richard Hughes could only look to a weaker reading for productivity growth ever since the financial crisis. Between 2009 and 2020, it was believed that productivity growth averaged at around 0.7 per cent per year, nearly half of the OBR’s optimistic projection of 1.3 per cent trend growth each year into the future.
Officials at the watchdog decided last year was finally time to revise its crucial figure, which underpins analysis of future government income. The last time the OBR had reviewed its productivity measures was in 2017. Earlier years would not have been appropriate, according to the OBR’s top three economists, due to the impacts of the pandemic, the war in Ukraine and the vulnerability to criticism around revising forecasts in an election year.
In turn, the Budget assessor decided to downgrade its trend productivity outlook to a middle ground figure of one per cent. Each 0.1 percentage point decrease added around £7-8bn in costs against the Chancellor’s fiscal headroom, Raja said, making the total downgrade worth around £25bn. Those costs were partly offset by upgrades on wage growth and inflation projections, leading to greater levels of fiscal drag, which is when rising incomes push taxpayers into higher tax brackets. Nevertheless, Reeves announced a tax raid worth £26bn, around a year after she had raised taxes by around £40bn.
Ten months later, the ONS revealed it decided to rethink its calculations on productivity in the years since the Great Financial Crisis. Given the ONS’ failure to gather responses for its Labour Force Survey and its struggle to reform essential research methods, official statisticians opted to improve arithmetics by considering HMRC data, for example.
As a result, that 0.7 per cent growth figure between 2009 and 2019 was nearly doubled to 1.3 per cent. The research that the OBR used to judge Reeves’ plans proved to be slightly off the mark.
Healey’s escape
While this re-evaluation could prompt the OBR to rethink its growth forecasts, economists do not expect it to look over productivity estimates so soon after last year’s review. Importantly, its change is mainly due to its downgrading the number of hours worked after the financial crisis.
Resolution Foundation economist Greg Thwaites said it would be “perverse” for the OBR to revise up its productivity growth averages without altering its assumptions on the number of hours worked in the UK economy. If it did both, Healey would not benefit from any major windfall as the positive impact of a productivity upgrade would effectively be neutralised by a change in the underlying calculation.
Speaking of the OBR’s downgrade last year, Thwaites said: “When they downgraded [productivity forecasts], they could have downgraded them by more than they did.”
If anything, economists agree that the “productivity puzzle” facing the UK was not worse than that faced by several major European economies such as Germany.
Growth of two per cent?
The best string of news to support Healey this year is a boom in the technology sector’s growth. Lord Jim O’Neill, the former Goldman Sachs executive who is seen as a close ally to Andy Burnham, said he believed consensus around the UK economy’s path could be wrong given GDP respectively expanded by 0.6 per cent and 0.5 per cent in the first two quarters of the year.
“I think, growth over the first half of the year is actually running in excess of two per cent,” O’Neill told MPs last week.
“The productivity numbers have finally started to improve, just when – amusingly – the OBR gave up on that ever being possible, even without the revisions to the mainstream calculation. It could be something of more substance.”
Productivity data in the last two years has also enthused City economists. Between late 2024 and mid-2026, output per worker has annualised at around 1.6 per cent, much closer to the trends enjoyed under Tony Blair in the noughties.
According to Thwaites, the OBR could choose to look past the recent run of momentum in the UK economy or “bank the gains” into its forecasts over the near-term, which would in turn offer the Chancellor some relief over near-term borrowing estimates and give him further wriggle room.
As for Reeves, the defence of her legacy has become somewhat easier. Her former economic adviser, Professor Anna Valero, credited the former Chancellor for the better productivity results as her push to boost capital investment has been “so crucial for growth”.
Reeves has herself appeared to launch a bid to defend her policies on growth. At an event at Oxford University, she nonchalantly noted the IMF’s endorsement of debt reduction plans she had pencilled in, and added that productivity “rebounded” in the two years during which she was Chancellor. She received a round of applause from leading academics for her intervention.