Rachel Reeves, the expected incoming Chancellor, made it clear in her Mais lecture in March 2024 that she will largely keep the current government’s fiscal framework.

All potential Chancellors have learned from the Truss episode that their first priority has to be to keep the markets onside. So if anything she may well err on the side of prudence.

Since her party has various spending commitments and is promising not to raise the main taxes (income tax, national insurance and VAT), this will constrain policy.

One solution would be to enable the economy to grow faster. It appears that her party hopes that green tech, relaxed planning rules and an industrial strategy will enable this. On the other hand, increased environmental restrictions and workers’ rights may reduce growth while higher rates of capital taxes and taxes on non doms are also likely to constrain capital investment.

Moreover, even the OBR’s current plans assume an acceleration in GDP per capita growth and that public sector productivity will resume growth. While most forecasters share their views, they assume that somehow productivity recovers in both the public and private sectors, assumptions that may not be met.

There are few fully satisfactory explanations of why productivity in both the private and public sectors has performed so badly recently (though the Growth Commission which I chaired has made some suggestions). Former Treasury permanent secretary Lord Macpherson has gone so far as to suggest that reviving public sector productivity has to be the incoming government’s top priority.

If GDP per capita, which in Q1 was just over 1 per cent below both its pre Covid peak and also below its level in early 2022, simply flatlines rather than growing at about 1 per cent per annum as forecast by the OBR, this will cost on our calculations over £190 billion in annual lost tax revenues by fiscal year 2028/29. If public sector productivity, which has fallen by 2.8 per cent since its post Covid peak in 2021 Q4 and by 6.8 per cent since its pre Covid level in 2019  Q4, simply flat lines rather than recovering, this would add about £70 billion to annual borrowing by 2028/29. If the current trend of falling public sector productivity continues, borrowing in 2028/29 would be £140 billion higher.

Translating these numbers into shares of GDP, the projected £190 billion fiscal shortfall from slow growth would add 6 per cent of GDP to annual borrowing in 2028/29; the £140 billion extra spending from a continuation of the current public sector productivity trend would add 4.4 per cent of GDP to annual borrowing. In either case, let alone if both had to be faced together, the debt ratio would explode. Our estimates suggest that if both happened, public sector debt by 2028/29 would have exploded to 125 per cent of GDP and would be rising by 9 per cent of GDP each year.

All this is just accountancy. And, in practice, could not happen – the market reaction would dwarf that during the Truss episode and in practice would force policy changes. This is especially so in a world where the burgeoning US Federal deficit means the Congressional Budget Office is forecasting a US debt ratio of 122 per cent of GDP by 2034. Financial markets are likely to be becoming increasingly sensitive to the burden of government debt in the coming years.

But it draws attention to the biggest uncertainties about how the new government’s fiscal maths add up – without getting both a resumption of economic growth and some control over public sector productivity, the future for both taxes and spending is bleak.

Taxes, which themselves tend to inhibit growth, will rise especially as the government has ruled out rises in those taxes which do the least economic damage. It seems highly unlikely that enough revenue can be raised from tax increases which means that spending would also have to be cut.

Unless the productivity trend in both the UK’s private sector and even more importantly the public sector can be turned around, the country will be looking back in the 2030s to the nirvana of 2024 when by comparison the economy seemed to have been doing so much better. Just because things may currently look bad doesn’t mean they can’t get worse or indeed much worse.

Douglas McWilliams is Deputy Chairman of Cebr

Write to us with your comments to be considered for publication at letters@reaction.life