Budget 2026 through a productivity lens
By Jun Du, Managing Director, The Productivity Institute
The Budget sees the UK’s productivity problem. Will it solve it?
Buried in the growth chapter of Wednesday’s Budget is what may be its most important productivity passage, and it is a diagnosis rather than a policy. The Treasury notes that the UK ranks sixth in the world on the Global Innovation Index but 15th for knowledge diffusion, and that the dynamism which moves workers and capital towards more productive firms has weakened [1]. Generating ideas is not the UK’s only constraint, and perhaps not its most binding; spreading them and letting successful firms grow matter at least as much. The test of the Budget is whether its measures change the conditions under which firms invest, adopt and reorganise.
With headroom against the fiscal rules down to £15 billion in 2029-30, the Chancellor had little room. He used it to finance investment, set out a roadmap for fiscal devolution and take some well-judged steps on start-ups and labour mobility. Early reaction has been cool: the CBI said the Budget lacks the bold moves firms need, and the Resolution Foundation called it scattergun. The OBR has left its assumption for underlying productivity growth unchanged [2], which reflects forecasting convention as much as a verdict, but means no productivity gain is yet banked.
1. What TPI asked for, and what we got
In September TPI sent HM Treasury five low-cost asks. Read against them, the Budget makes real progress on the institutions of devolution, less on the barriers to investment, and least on the mechanisms that connect innovation and openness to productivity.
Devolution. The Fiscal Devolution Roadmap sets out income tax assignment for mayors from 2028, a 20% share of locally retained business rates from next year and full retention by local and regional government by the end of the decade [3], A £150 million uplift in capacity funding for strategic authorities meets part of our ask; the missing piece is a common framework, such as the Mayoral Combined Authority Productivity Scorecards TPI already publishes, for judging whether new powers raise productivity. With UK subnational gaps the third widest of 41 OECD countries, and retention tending to reward places already growing, transferring fiscal responsibility is not the same as raising productivity. Devolution also needs to run in parallel with coordination from the centre: a national framework that aligns incentives, maintains cross-regional infrastructure and equalisation, and ensures that local autonomy advances, rather than fragments, the Industrial Strategy.
Business rates. We asked the government to stop rates rising when firms invest, in an economy where workers have around a third less capital per hour than in the US, Germany, France and the Netherlands. The Budget instead widens relief and freezes bills for small retail, hospitality and leisure properties, explicitly excluding increases in rateable value from improvements [4].
Inward investment. We asked the Office for Investment to judge projects by their effect on productivity, supply chains and skills rather than job counts, because lagging places tend to attract the least productive foreign investment. The new Strategic Sites Accelerator, mobilising around £700 million with the National Wealth Fund, makes measuring success more pressing [5].
Health. We asked for health spending to be appraised against its return to employment and earnings by place. A ringfenced preventative spending category from the 2027 Spending Review and a revised Green Book that gives more weight to long-term benefits come closer to this than the NHS productivity review [6]; counting labour-supply returns within both would complete the picture.
Trade with the EU. Our research finds a substantial fall in the range of products the UK exports to the EU since the Trade and Cooperation Agreement, a loss still widening in 2025. On Wednesday the Prime Minister called the current deal not good enough, yet the Budget’s trade section does not mention the EU [7]. Before the Brussels summit on 20 November, a transparent assessment of the options would help, separating what the UK can do itself, such as simplifying how firms prove origin, from what needs technical negotiation, such as mutual recognition of product testing, and what needs a political settlement.
2. What else in the Budget could help productivity
TPI welcomes the Budget’s most significant contribution to productivity, its support for investment financing. Our synthesis of more than eighty studies identifies chronic underinvestment as one of the main causes of the UK’s weak productivity growth, so £20.4 billion more for the National Wealth Fund and British Business Bank addresses a real constraint [8]. The capital allowance changes are less generous than the headline suggests: they modestly improve the incentive for new investment, but slow the write-off of past investment by more, so overall they raise around £1.1bn a year. It is more of a revenue measure than an investment stimulus [9]. Public investment is also squeezed, with departmental capital budgets trimmed by 1% from 2027-28 to help fund defence [10], a cut the Campaign for Science and Engineering warns could fall disproportionately on R&D.
Two measures speak directly to diffusion. The government will legislate so that non-compete clauses no longer stop workers moving to start-ups and scale-ups, with a detailed position due in early 2027 [11]; since knowledge travels between firms largely in people, this could matter more than its profile suggests. The Budget also uses public procurement to create demand for innovative products, though wide adoption across the business population is a different task, and the measures aimed at it, such as £15 million for local AI adoption partnerships, remain small [12].
The returns to all of these depend on complementary changes. Investment without organisational capability, technology without diffusion, and devolution without central coordination may each deliver much less than their potential. A collection of sensible measures is not yet a productivity strategy.
3. Where the path lies from here
The key question we return to is whether the UK’s firms, places and institutions can adapt fast enough as energy shocks, fragmenting trade and AI change what is possible. Adaptation takes three forms.
Inside firms, the issue is organisational change rather than access. Business use of AI has roughly tripled since late 2023 on firms’ own survey responses, while the number of technologies used by a typical adopter has barely moved: adoption is wide and shallow. What matters is whether firms reorganise processes, roles and management around the technology, and support for that will achieve more than programmes that only widen access.
Around places, the issue is collaboration. Fiscal retention could lead neighbouring authorities to compete for the same firms and funds, yet many gains come from combining complementary strengths to build scale and scope. The Cambridge-Manchester Innovation Partnership links a research-intensive cluster with a large industrial city region, and the Budget extends the model with £19.75 million for similar university partnerships [13]. Devolution baselines should reward such collaboration and track whether growth in strategic sectors reaches local suppliers.
Beyond the UK’s borders, the issue is position. With industrial policy spreading, from US tariffs and Chinese state support to the EU’s proposed “Made in EU” conditions, mobile investment increasingly follows subsidy, security and market-access rules as well as costs and capabilities. The UK can no longer assume that openness alone will attract foreign capital or that its benefits will spread locally; investment needs to strengthen domestic capabilities and supplier relationships that can outlast shifting incentives. The UK uses these tools too: the July cut of 51% in tariff-free steel quotas may protect domestic capacity, but it raises costs for every firm that uses steel [14]. Trade defence can buy time; it cannot be the growth model.
The Budget is more convincing in its diagnosis than in its remedies. The 2027 Spending Review will be an important test, but some of the most valuable changes need not wait for it. They concern the rules, incentives and institutional capabilities that determine whether investment and innovation become sustained productivity growth, and many require political commitment and coordination more than new spending.
[1] HM Treasury, Budget 2026 (HC 726, October 2026), paras 4.10–4.11. All Budget references below are to this document.
[2] Budget 2026, para 1.34: underlying total factor productivity growth reaches 0.8% in 2030, unrevised since March.
[3] Budget 2026, paras 4.60 and 6.46.
[4] Budget 2026, paras 6.190–6.191; on the response to the call for evidence on business rates and investment, paras 3.25–3.26 and 6.198.
[5] Budget 2026, para 6.98.
[6] Budget 2026, paras 2.21, 2.22 and 6.8.
[7] Budget 2026, para 4.124.
[8] Budget 2026, para 4.46.
[9] Budget 2026, para 6.251 and Table 6.1, measure 58.
[10] Budget 2026, para 2.6.
[11] Budget 2026, paras 4.108–4.110 and 6.93.
[12] Budget 2026, paras 4.115–4.121 and 6.101.
[13] Budget 2026, para 6.65.
[14] Budget 2026, para 6.79.
