Declining Productivity Puts Pressure on Labour’s Fiscal Objectives

With the UK economy predicted to experience a downgrade in productivity, Chancellor

Rachel Reeves now faces a moral dilemma - should she break the Labour Party’s election

manifesto pledge not to increase taxes on working people, or stay true to her party’s

Promise?

Since Labour’s return to power following the 2024 general election, the government’s key

fiscal target of balancing the UK budget by 2029–30 has been met with unprecedented

challenges. Initially, despite analysts predicting a productivity downgrade of 0.1-0.2

percentage points, the Office for Budget Responsibility (OBR) is now expected to cut its

trend productivity forecast by around 0.3 percentage points. This could create a £20-30

billion shortfall, undermining the level of growth needed to balance the government’s budget. 

The UK suffers from a chronic productivity gap compared to other developed nations in

Western Europe and North America. A 2023 study by the London School of Economics

found that France and Germany were 13% and 14% more productive than the UK, respectively. This leaves the British economy more vulnerable to shocks than its trading partners, a problem exacerbated by Brexit and the COVID-19 pandemic.

Chancellor Reeves has attributed the UK’s lacklustre economic performance to several

factors, including the poor record of the previous Conservative government, global conflicts

disrupting trade, and tariffs imposed by the US government on UK exports.

Prime Minister Keir Starmer has declined to rule out introducing new taxes to address the

budget deficit, despite the manifesto commitment not to raise taxes on working people.

Reeves is currently examining a wide range of options to increase government revenue

ahead of her Budget later this month, when she is expected to outline the measures to fill the

fiscal hole.

“It would, of course, be possible to stick with the manifesto commitments, but that would

require things like deep cuts in capital spending,” Reeves told BBC 5Live. “I have been very clear that we are looking at both taxes and spending,” she added.

One option under consideration is prolonging the personal tax freeze introduced by the

previous Conservative government in 2022 to repair public finances following the COVID-19

pandemic. Under this policy, income tax thresholds remain fixed, meaning that as nominal

wages rise with inflation, people gradually pay a higher proportion of their income in tax.

Extending the freeze could raise around £10 billion a year without technically breaching

Labour’s promise not to raise tax rates.

Another proposal, suggested by the Resolution Foundation think tank, is to increase income

tax by 2p while cutting National Insurance contributions by 2p for employees. This would directly raise additional revenue, but it would also risk a major voter backlash, as it would represent a direct breach of Labour’s election pledge and could reduce disposable income for pensioners.

Reeves has also reportedly explored the idea of a ‘mansion tax’, an extra tax levied on owners of high-value properties, either by increasing council tax for the top property bands or introducing a new band for the super-wealthy.

In a September 2025 article, the Institute for Government (IfG) described Reeves as being in

a “triple bind,” stating: “Reports that the OBR is likely to downgrade its growth forecast mean she will need to raise additional revenue to stay within her fiscal rules. With departmental spending settled in June’s spending review, and the chancellor’s attempts at welfare reform to plug the gap faltering, this almost certainly means further tax increases.”

The IfG also warned against relying on ‘stealth taxes’ or smaller, lesser-known levies to raise

funds. While such measures may be politically convenient in the short term, the institute

argued that overreliance on them could distort the tax system, discourage investment, and

hinder long-term economic growth.