Chancellor to face gloomy fiscal outlook in Budget

The Office for Budget Responsibility (OBR) plans to cut its productivity growth predictions for the next five years - a move expected to hit Government tax receipts and drag on UK economic growth.

In October, the watchdog said its productivity downgrade would weaken the outlook for the UK’s public finances, diminishing the £26 billion headroom Mr Hammond had gained ahead of the autumn Budget.

Productivity, which increased by 0.9% between July to September, refers to the amount of work produced either per worker or per hour worked.

Howard Archer, EY ITEM Club’s chief economic adviser, said the productivity cut would be a “major fly in the ointment” for Mr Hammond.

He said: “The OBR has repeatedly assumed in recent years that there will be a marked pick-up in the UK’s productivity performance and this has failed to materialise.

“Consequently, the OBR has now come to the conclusion that some of the temporary factors that it believed were holding back productivity are having a permanent impact.

“It therefore seems probable that the OBR will reduce its GDP (gross domestic product) growth forecasts for the UK and appreciably lift its budget deficit projections.”

In March, the OBR revised up its GDP outlook for this year from 1.4% to 2%, but downgraded next year’s growth from 1.7% to 1.6% and 2019 from 2.1% to 1.7%, before predicting 1.9% growth in 2020 and 2% in 2021.