LONDON (Reuters) - Britain’s official budget watchdog said on Tuesday it expects to “significantly” downgrade its forecasts for productivity growth in the next five years, something that could hammer the government’s finances.
The Office for Budget Responsibility said abnormally low interest rates could be weighing on productivity growth - key to the outlook for living standards - by allowing weak and indebted firms to survive.
“We anticipate significantly reducing our assumption for potential productivity growth over the next five years in our forthcoming November 2017 (forecasts),” the OBR’s report said.
Britain’s productivity performance is still likely to pick up compared with recent years, but uncertainty around Brexit would hamper investment, the OBR added.
Finance minister Philip Hammond is due to present an annual budget on Nov. 22. Although he is under pressure to increase public spending and eliminate a pay cap on public sector pay, any cut in productivity forecasts would substantially limit his room for manoeuvre by reducing future tax revenues.
Reporting by Andy Bruce, editing by David Milliken