Office for Budget Responsibility warns artificial intelligence could raise productivity but benefits may arrive beyond current fiscal forecasts.
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| Commuters wait to cross a street near the Bank of England headquarters in the City of London, United Kingdom, on November 6, 2025. Photo by Chris Ratcliffe/Bloomberg/Getty Images |
Artificial Intelligence (AI) could provide a substantial lift to the UK economy, analysts suggest, yet its benefits are expected to arrive too late to improve growth rates within the current Labour government’s parliamentary term. The Office for Budget Responsibility (OBR), the country’s independent fiscal watchdog, released new analysis highlighting both the potential and the uncertainty surrounding AI’s impact on productivity and public finances.
The OBR estimates that AI could contribute as much as 0.8 percentage points to productivity growth over the next decade, a shift that would significantly strengthen the UK’s fiscal position. However, it cautioned that most of these gains are likely to materialize in the second half of the 2030s, meaning they fall outside current government forecasts and beyond the next general election cycle.
Within the OBR’s five-year forecast, AI is projected to provide a more modest boost of only 0.2 percentage points to productivity growth. While this represents some improvement, it is unlikely to alleviate the immediate fiscal pressures facing Chancellor of the Exchequer Rachel Reeves, who is navigating a challenging economic landscape and a Labour government struggling in opinion polls less than 18 months after its election landslide.
Policymakers and economic experts have hailed AI as a transformative, general-purpose technology, comparable in impact to past waves of innovation such as the industrial revolution and the advent of computers. Bank of England Governor Andrew Bailey has described AI as holding the potential to fundamentally reshape productivity, output, and the broader economy.
Yet the OBR highlights the risks and uncertainties associated with widespread AI adoption. A key concern is the possibility of labor market disruption, particularly if AI initially leads to job displacement before complementary effects take hold—a pattern described as a J-curve trajectory. Early disruptions could limit the overall boost to the economy, reducing the immediate fiscal benefits.
“It’s no secret that unlocking faster productivity growth is the panacea for the UK’s fiscal challenge, and AI could well be part of the solution,” said Dan Hanson, chief UK economist at Bloomberg Economics. “However, the boost would have to be dramatic to alleviate the longer-term pressures on public finances. The big risk is that AI adoption comes with significant disruption in the labor market, limiting the boost to the economy as a whole.”
The OBR’s assessment draws on multiple studies of AI’s potential economic impact, which vary widely in their conclusions. The analysis considers both S-curve and J-curve adoption scenarios. An S-curve implies rapid gains followed by a plateau, whereas a J-curve suggests a slower start with acceleration later. The watchdog judges the J-curve as more probable, meaning that benefits will accrue gradually before reaching full effect.
The report estimates that around 40% of UK jobs could be materially affected by AI in the next decade, though most of these roles are expected to be complemented rather than fully replaced. Finance and professional services sectors are particularly exposed, with automation and AI tools likely to enhance efficiency while reshaping skill requirements.
“Even if achieved, most of the impact would likely occur in the latter half of the 10 years,” the OBR noted. “The timing and magnitude of this boost remains highly uncertain, and will hinge upon the evolution of AI technology, the pace of adoption, and the regulatory environment.”
Capturing even a portion of AI’s potential productivity gains would materially alter the UK’s fiscal backdrop. According to the OBR, a sustained increase of 0.4 percentage points in productivity growth across its forecast horizon could generate an additional £44 billion ($58 billion) in tax revenue by 2030/31, delivering a surplus on the current budget. This stands in contrast to the measures Chancellor Rachel Reeves has recently undertaken, which included raising various taxes just to secure a £22 billion buffer against her rule to balance day-to-day spending with receipts.
With the UK facing an aging population and rising expenditure pressures—from defense to climate initiatives—the need for a significant productivity boost is pressing. AI’s long-term promise could help ease debt pressures and strengthen the sustainability of public finances, but only if adoption accelerates and complementary policies are implemented effectively.
The OBR also highlighted that the timing of AI’s impact is highly sensitive to regulatory frameworks, corporate adoption rates, and technological progress. Faster adoption and supportive regulation could accelerate benefits, whereas delays in AI implementation or restrictive policies could push gains further into the future.
While AI is widely promoted as a transformative tool for business efficiency, experts caution that over-optimism may obscure the transitional challenges, particularly in workforce retraining, sectoral shifts, and short-term unemployment risks. Policymakers will need to balance incentives for innovation with protections for workers affected by automation.
Bank of England perspective
To date, the Bank of England has not factored AI’s potential productivity gains into its forecasts. Rate-setter Megan Greene acknowledged that while the BOE focuses on shorter three-year projections, AI’s long-term implications for supply-side capacity will eventually need consideration.
“We might judge differently the next time around because a lot has changed,” Greene said. “But if you’re wondering what’s gone into our forecast, AI hasn’t really fit into it.” This highlights the cautious approach regulators and policymakers are taking when accounting for disruptive technologies that have uncertain timelines and effects.
The OBR’s analysis paints a picture of AI as a technology with transformative potential for the UK economy, yet one whose benefits are unlikely to rescue short-term growth or relieve immediate fiscal pressures. For Chancellor Rachel Reeves and the current Labour government, the message is clear: while AI could bolster long-term productivity and revenues, it cannot solve the immediate economic challenges faced by policymakers.
Experts suggest that capturing AI’s potential requires careful planning, including workforce retraining, regulatory adaptation, and incentives for innovation adoption. Absent these measures, the technology’s transformative benefits may be delayed, leaving fiscal pressures and political challenges unresolved in the near term.
