Reeves faces £18bn risk over productivity targets

The government’s fiscal plans could unravel by the end of the decade unless public sector productivity improves at an unprecedented pace, the Institute for Fiscal Studies (IFS) has warned.

In its Green Budget 2025, the IFS said that Chancellor Rachel Reeves has tied her spending framework to annual productivity growth of about 1.0% in public services between 2025 and 2029. That would deliver around £14 billion in savings, £9 billion of which is expected to come from the NHS.

But if departments achieve only half the projected gains, maintaining service levels would require an extra £9 billion of spending in 2028–29. With no productivity growth at all, the gap could rise to £18 billion.

Olly Harvey-Rich, a research economist at the IFS, said: “Productivity growth is the key to making the Chancellor’s numbers add up. If it fails to materialise, either spending will need to increase, taxes will need to rise, or the quality of public services will fall.”

The scale of the challenge is evident in recent history. From 1997 to 2019, average public sector productivity growth was just 0.2% a year, according to Office for National Statistics data. Between 2009 and 2019, it rose to 0.7%, still below the levels required under Reeves’s assumptions.

The IFS analysis highlights that Reeves is counting on major efficiency gains from digitisation, automation, and artificial intelligence across public services. Departments are expected to deliver five per cent “savings and efficiencies” by 2028–29, with cuts to central administration and investment in new technology positioned as the main drivers.

The Office for Budget Responsibility is expected to downgrade its productivity outlook later this year, underlining the fiscal risk. A weaker forecast would increase pressure on the government’s ability to meet its fiscal rules, which commit to a balanced current budget by 2029–30 and falling debt as a share of GDP.

Political and operational challenges also loom. Delivering sustained productivity growth will require upfront investment in digital infrastructure and training, alongside cultural change across the civil service. Public service unions have already expressed concern that “efficiency savings” could translate into service cuts rather than genuine reform.

The NHS is likely to face the greatest scrutiny. With nearly two-thirds of the planned savings tied to health productivity, questions remain over how trusts can increase efficiency while contending with rising demand, workforce pressures, and stretched budgets.

Reeves has positioned her strategy as a necessary reset after years of under-investment, insisting that fiscal discipline is compatible with modernising public services. Speaking after the budget, she said: “Our mission is growth, and that starts with delivering better public services through smarter government.”

But the IFS cautions that the Chancellor’s plan leaves little margin for error. If efficiencies falter, the Treasury may be forced into difficult choices on tax rises, borrowing, or cuts elsewhere.

The coming months will be pivotal as departments set out detailed plans for transformation. The credibility of the government’s economic programme, and the resilience of public services, may depend on whether those plans can deliver the productivity gains Reeves is banking on.