The Chancellor is grappling with a big headache – the UK’s woeful productivity – which could trigger the need for spending cuts and tax rises in the Budget
Growing the economy is “absolutely crucial” to boosting people’s living standards, Rachel Reeves has declared.
Speaking at a gathering of business leaders in Saudi Arabia, the Chancellor admitted that in order to do so the government needed to help improve the UK’s flagging productively. It comes after reports that the government is facing a bigger-than-expected hole in the public finances.
The Office for Budget Responsibility is reportedly set to downgrade its forecast for productivity – a measure of the output of the economy per hour worked – delivering a blow to the public finances of more than £20billion. The fresh hit will fuel speculation of worse-than-feared spending cuts and tax hikes in next month’s Budget.
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Ms Reeves, speaking a the Future Investment Initiative (FII) event in Riyadh, dubbed the “Davos in the Desert”, said artificial intelligence would be part of solving the productivity puzzle, both in government and private industry. She reiterated the message that economic growth was the government’s “number one priority”.
During a question and answer session, she went on: “Public consent is a lot higher when people see their living standards improve and to do that you have to grow the economy which means boosting productivity. Investing in infrastructure, investing in technology, both at a business level and state level, is absolutely crucial if you are going to have growth.”
She acknowledged that the OBR – the government’s official forecaster – was likely to downgrade the UK’s productivity outlook. But she insisted it was “based not on anything the government has done”, but on issues dating back to Brexit and the earlier financial crisis.
“I’m not going to do anything in the Budget that reduces our opportunities to grow the economy,” she insisted. “That’s very important.”
Ms Reeves used the event to encourage international business leaders to invest in the UK. It came as the Chancellor said she hoped to reach get agreement on a UK trade deal with the six Gulf Cooperation Council countries “very soon”, having already struck deals with the EU, US and India.
“Britain is very much open,” she declared. “Open for trade, open to investments, , open for talent, and open for business.”
However, she admitted that inflation was “too high” in the UK. It comes after the International Monetary Fund recently forecast UK faces the highest inflation in the G7 group of countries this year and next.
“There is too much cost associated with trade with our nearest neighbours and trading partners”, Ms Reeves said, having already blamed the impact of Brexit.
She hailed the UK’s trading agreement with the EU, adding: “The worry that we had as a government was that reopening that can of worms with the European Union might be quite dangerous. Actually the response has been quite good.”
According to the Financial Times, the OBR is set to downgrade the UK’s productivity outlook by 0.3% at the Budget, more than analysts were expecting.
Separate figures released on Tuesday will have given the Treasury a timely boost, showing the private sector picked up pace this month as manufacturing production increased for the first time in a year. Industry was partly helped by the resumption of production at Jaguar Land Rover after the car giant’s factory shutdown, caused by a major cyber attack.
The S&P Global flash UK composite purchasing managers’ index (PMI) reported a reading of 51.1 in October, rising from 50.1 in September. The flash figures are based on preliminary data.
Any score above 50.0 indicates activity is growing while any score below means it is contracting. October’s reading was slightly stronger than expected, with economists having predicted 50.7.