Canary Wharf skyscrapers as seen from Greenwich Park in London, Britain, September 30, 2025. REUTERS/Corey Rudy

By Alistair Smout

LONDON (Reuters) -Britain's budget watchdog is expected to cut a key productivity forecast by a larger-than-expected 0.3 percentage points, people familiar with the situation said, potentially leading to a 20 billion-pound ($26.8 billion) hit to the public finances.

Finance minister Rachel Reeves has said the Office for Budget Responsibility is likely to cut its productivity forecast after acknowledging it had been too optimistic in the past.

But a 0.3% downgrade - first reported by the Financial Times and larger than the 0.1 or 0.2 percentage-point cut that had been expected - will place more pressure on Reeves as she prepares her budget for November 26.

The Institute for Fiscal Studies, a think tank, estimates that each 0.1 percentage point downgrade to annual productivity growth would raise public borrowing by 7 billion pounds by the 2029/30 financial year.

MASSIVE SPENDING SHORTFALL NEEDS ADDRESSING

Analysts had already expected Reeves to need to fill a spending shortfall of up to 30 billion pounds based on the lower productivity downgrade as well as a reversal of planned welfare savings by Prime Minister Keir Starmer and other factors.

Speculation has mounted as to which tax rises and spending cuts will be needed to keep the government on track for its fiscal targets and avoid upsetting bond investors.

The finance ministry said it would not comment on the media reports.

Reeves, speaking at a conference in Saudi Arabia on Monday, reiterated that the expected downgrade was due to weak productivity numbers since the 2008 financial crisis and Britain's departure from the European Union in 2020.

The OBR's outlook for trend productivity - measured as output per hour worked - is central to its economic projections which, in turn, underpin its fiscal estimates. Those estimates have yet to be finalised.

'SEVERAL MOVING PARTS' TO ESTIMATING IMPACT TO BUDGET

JP Morgan economist Allan Monks said there were several moving parts involved in estimating the size of the hit to the budget from the reported productivity downgrade which, he said, could reach almost 27 billion pounds.

But other factors such as a recent fall in borrowing costs in financial markets or more people coming into the jobs market could help limit the damage.

"For now, we are still assuming a 20-30 billion-pound range, but with the risk that this could be exceeded to some degree," Monks said.

As well as offsetting the productivity and welfare hit, Reeves has said she would like to raise her headroom for meeting her budget targets - including a goal to balance day-to-day borrowing with tax revenues by 2030 - from the relatively small 9.9 billion-pound buffer she previously given herself.

($1 = 0.7451 pounds)

(Reporting by Mrinmay Dey in Bengaluru and Alistair Smout and Kate Holton in London; Writing by Muvija M; Editing by Sharon Singleton, Chizu Nomiyama and Bernadette Baum)