The UK’s economy is facing a double whammy that’s set to constrain growth for years to come, according to the latest Economic and Fiscal Outlook from the Office for Budget Responsibility (OBR).
Released on Tuesday (3 March), the report paints a picture of an economy hampered by a diminishing labour force and productivity growth that refuses to accelerate beyond modest levels.
At the heart of the workforce challenge is a slowdown in population growth, driven primarily by sharply lower net inward migration. The OBR now forecasts average net migration of just 235,000 people per year from 2026 to 2030, a significant downward revision of 60,000 annually compared to its November 2025 outlook.
As a result, the UK’s adult population (aged 16 and over) is projected to grow more slowly, reaching 58.1 million by 2030 – about 200,000 fewer than anticipated in the prior forecast.
Compounding this is an ageing population, which is expected to push the labour force participation rate down slightly from 63.5% in 2025 to 63.3% by 2030.
As the report notes, “the effect of the ageing population on average hours and participation” is a key factor dragging down labor supply growth, which is set to decelerate from 0.5% in 2026 to 0.4% by 2030.
This shrinking workforce is already manifesting in the labour market. Unemployment is forecasted to peak at 5.3% in 2026, up a third of a percentage point from the November estimate, before gradually declining to 4.1% by 2030.
Employment levels are also revised downward, with 34.2 million people employed in 2026, rising modestly to 35.2 million by 2030, but still 0.1 to 0.2 million lower each year than previously thought.
The OBR attributes much of the near-term weakness to subdued hiring amid weaker economic demand, with new entrants to the job market particularly hard-hit.
A rise in inactivity
Adding to the pressure is a rise in economic inactivity, including a surge in incapacity and disability benefit caseloads. The report projects incapacity benefits recipients to increase by 0.6 million to 4.0 million by 2030-31, while disability caseloads could swell by 2.3 million to 8.8 million.
These trends not only strain public finances, boosting welfare spending by £0.7 billion in 2030-31, but also sideline potential workers, further constricting the labour pool.
On the productivity front, the story is one of persistent underperformance. The OBR expects medium-term productivity growth to hover at 1% annually, unchanged from its previous forecast but well below the pre-financial crisis average of around 2%.
Trend productivity per hour is projected to start at 0.7% in 2026-2027, edging up to 1.0% by 2030, driven in part by total factor productivity (TFP) reaching 0.8%.
However, the report cautions that this assumes a gradual recovery from post-crisis weakness and shocks like the financial crisis and COVID-19, with uncertainties around emerging factors like AI and planning reforms.
“Historically weak post-financial crisis (0.5% average),” the OBR states, highlighting how productivity has lagged, leaving real GDP per person at the same level in 2030 as in 2019 – far short of where it might have been if pre-crisis trends had continued.
If productivity had grown at 2% annually since 2008, GDP per person would be about 30% higher today. Instead, the forecast sees real GDP per person growing at just 1.1% on average from 2026 to 2030.
Dual pressures
These dual pressures are squeezing the UK’s potential output growth, now forecasted at 1.3% on average from 2026 to 2030, down 0.1 percentage points from November.
Real GDP growth is expected to be subdued at 1.1% in 2026 before averaging 1.6% from 2027 to 2030.
The output gap, a measure of economic slack, is wider than previously thought, averaging -0.7% in 2026-2027, which could keep inflation in check but also signals underutilized resources.
A smaller workforce means higher per-person public spending pressures, with real resource departmental expenditure limits (RDEL) per person rising to £7,800 in 2028-29, up from £7,700.
On the fiscal side, weaker labour market data is already trimming tax receipts, with non-self-assessment income tax and national insurance contributions down £1.5 billion in 2025-26.
The OBR warns of risks on both fronts. Productivity could disappoint further if it remains stuck at post-crisis averages of 0.5%, potentially ballooning government borrowing by £40 billion in 2030-31.
Conversely, an upside scenario with 1.5% growth, perhaps fuelled by AI, remains possible but uncertain. For the workforce, further declines in migration or rises in inactivity could exacerbate the squeeze.
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