17 September 2025: The OBR downgrades UK productivity

The state pension is set to rise by 4.7% next April, since it is based on the September inflation data.

A Method labelled the Triple Lock is used to determine the increase. It means that pensioners receive an annual increase of the highest of inflation, average wages and 2.5%.

The measure was introduced by the coalition government in 2010 and implemented in 2012. When inflation was low and wages followed suit, the annual increase was set at 2.5% but following the upheaval created by the Pandemic, it has been far higher.

Concerns have been raised by the Office for Budget Responsibility (OBR) over the long-term sustainability of the triple lock. Based on the OBR’s research, the state pension triple lock is costing the Government £10billion more than initially projected at a time when borrowing costs are at a record high.

It is feared that the Chancellor may be looking to either scrap or perform a radical overhaul of the system while preparing her budget, which will be delivered towards the end of November.

Having angered pensioners' rights groups last year by introducing means testing to the winter fuel payment, a measure which has subsequently been reversed, a similar change to the triple lock is likely to cause at least an equal level of protests.

Millions of older people could be dragged into paying tax on their state pension for the first time in 2027, experts have warned. Former pension ministers have told how people could be hit by Chancellor Rachel Reeves’ stealth tax raid in less than two years.

This is because the state pension is likely to increase by about 4.7% in April 2026, taking the new state pension to £12,535 a year, less than a pound a week short of the income tax threshold of £12,570.

With the triple lock formula guaranteeing an increase of at least 2.5% the following year, the headline rate of the new state pension is certain to exceed the current tax threshold by 2027.

Former pensions minister Sir Steve Webb, a partner at consultants Lane Clark and Peacock, said: “The standard rate of the new state pension is creeping ever closer to the frozen personal tax allowance.

It is already the case that nearly three-quarters of all pensioners pay income tax, and the ongoing freeze in tax thresholds, coupled with steady rises in the pension, will drag more and more into the tax net.

The OBR has reportedly told Chancellor Rachel Reeves that it will downgrade productivity forecasts for the UK economy, blowing a hole in the public finances and making tax hikes all but guaranteed. Officials briefed the Financial Times that Reeves would look to dodge blame for the downgrade by claiming that the previous Conservative government’s poor record on productivity had forced the fiscal watchdog to revise its calculations.

The untold story of this Budget is the historical legacy of the Conservatives that nobody knew about. The OBR productivity downgrade could amount to half or three-quarters of the fiscal hole.

The MPC will begin its monetary policy deliberations later this morning, with the vote set to take place tomorrow and be announced at a press conference at lunchtime.

Economists at Banco Santander SA, Schroders Plc and Pantheon Macroeconomics Ltd. expect the UK Bank to keep rates at 4% for the foreseeable future, with the knife-edge decision to cut in August ending its easing cycle after one year. Nomura Holdings Inc. said further reductions are in doubt if inflation does not come down as forecast.

Such views are not shared by traders, who still see one or two more cuts over the next year. However, it reveals just how far sentiment has turned in a matter of weeks after officials ramped up their hawkish rhetoric amid signs that inflation is proving far more stubborn than anticipated.

The pound rose again yesterday as the FOMC is expected to cut rates today and begin a fresh cycle of rate cuts in the U.S. It climbed to a high of 1.3671 and closed at 1.3643.

The FOMC is considered certain to announce a twenty-five basis point cut in official interest rates at the conclusion of its latest meeting later today.

This will be their first interest rate cut since December to support America’s slowing labour market, with the hopes that President Donald Trump’s expansive tariffs might have only a limited impact on inflation.

But there’s an elephant in the room as officials debate about the US economy, Trump’s aggressive effort to reshape the Fed’s top ranks. Yesterday, the Senate confirmed Stephen Miran, Trump’s top economic adviser, to serve on the Fed’s Board of Governors to complete a vacated term that expires at the end of January, but could be extended.

Miran has said he won’t commit to resigning when his term ends if a permanent successor hasn’t been named. After being sworn in yesterday morning, Miran can attend and cast a vote at this week’s Fed policy meeting.

Fed Governor Lisa Cook, whom Trump tried to fire in late August, will also cast a vote at this week’s meeting. An appeals court on Monday rejected Trump’s attempt to fire Cook, while her lawsuit challenging Trump’s removal order moves forward. Cook is the first Fed governor ever to be subject to a firing attempt.

The latest Fed meeting is extraordinary, not just because Central Bankers are finally pivoting their strategy on interest rates, but also because of the latest developments implicating the Fed’s powerful board, all while the Trump administration continues to pile pressure on the politically independent Central Bank.

There are clear divisions within the committee that are not totally transparent; anyone who labels the Fed Governors as the villains of the piece are not totally correct. While Trump has influence over some, there are also a handful of Governors who remain totally independent, even if they are unlikely to have their terms renewed.

The Presidents of the twelve regional Feds take turns to be voting members of the FOMC, and their loyalties are to the regional boards that remain outside the clutches of the President.

Mounting signs of labour market weakness are a key reason why the Fed is lowering borrowing costs for the first time in nine months, coupled with Fed officials’ growing belief that tariff inflation may be short-lived. Job growth during the summer was anaemic. Employers added an average of about 29,000 jobs in the three months ending in August, according to Labor Department data, slightly higher than July’s average, which was the weakest three-month pace since 2010, outside the pandemic.

The dollar index continues to be driven by not just this meeting's outcome, but a likely continuation of the cycle of rate cuts that will begin today.

It fell to a low of 96.56 and closed at 96.65, its lowest level since July 1st.

The Eurozone has faced several challenges that have contributed to its slower economic growth compared to some of its rivals, such as the United States and certain emerging markets.

It suffers from structural economic issues that have not been addressed, including rigid labour markets, varying levels of competitiveness among member states, and differences in economic policies. These disparities hinder overall economic performance. While many Eurozone countries are experiencing ageing populations, which can lead to a shrinking workforce and increased pressure on social welfare systems.

This demographic trend can also slow economic growth over time.

Several Eurozone countries, particularly those in Southern Europe and now joined by France, have high levels of public debt. This limits government spending and investment, which are crucial for stimulating economic growth. The European Central Bank has implemented low interest rates and quantitative easing to stimulate the economy. However, these measures have had varying degrees of effectiveness across member states, and some countries do not benefit equally from such policies.

There is growing political instability and uncertainty in some member states, which is affecting investor confidence and economic performance. Issues such as Brexit and rising populism have created uncertainty that can impact economic growth.

While the Eurozone has strengths, such as a large single market and a strong regulatory framework, addressing these challenges is crucial for improving its economic competitiveness and growth prospects in the future.

While the long-term challenges need to be met of the region is to have the kind of future hoped for by investors, in the short term, the economy is still subject to several global shocks, not least the imposition of Tariffs on its exports to the U.S.

Yesterday, we discussed the reliance on Russian energy, which leaves Germany prone to the whims of Vladimir Putin and his objectives to once again dominate Eastern Europe.

However, the economy is showing tentative signs of a recovery. Data published yesterday showed that industrial production recovered at a moderate pace in July due to the rebound in consumer and capital goods output amid higher tariff threats.

Industrial production registered a monthly growth of 0.3 percent, in contrast to the 0.6 percent decrease in June, Eurostat reported. However, the rate was slightly weaker than the forecast of 0.4 percent.

Among the main industrial groupings, production of non-durable consumer goods expanded the most in July, up 1.5 percent. This was followed by a 1.3 percent rise in capital goods and a 1.1 percent increase in durable consumer goods output. Intermediate goods production rose only 0.5 percent.

With the Eurozone indicating that any further rate cuts will not happen until the end of the year, the Euro is being driven by U.S. monetary policy, which is about to be softened. The single currency rose to a high of 1.1878 yesterday and closed at 1.1872.

While the 1.20 level has now come into focus, the unpredictability of the U.S. administration means that the dollar may still make a significant recovery in Q4.

Have a great day!