TL;DR

The UK’s Office for Budget Responsibility predicts AI could boost productivity growth by up to 0.8 percentage points within a decade, potentially transforming the country’s fiscal position. However, most benefits will arrive in the latter half of that period—beyond the current parliamentary term and too late to help Chancellor Rachel Reeves.

A Tantalising but Distant Promise

Artificial intelligence offers a tantalising vision for Britain’s sluggish economy, but the timing presents a political problem. According to the OBR, the technology could deliver a step-change in productivity growth that would transform the UK’s delicate fiscal position—yet most effects are likely to arrive in the second half of the coming decade.

In the OBR’s current five-year forecast, AI provides only a modest 0.2 percentage-point boost to productivity growth. That’s too late to significantly alter the precarious fiscal situation facing Chancellor Rachel Reeves, whose parliamentary term runs until mid-2029.

Dan Hanson, chief UK economist at Bloomberg Economics, noted: “Unlocking faster productivity growth is the panacea for the UK’s fiscal challenge and AI could well be part of the solution.” However, he cautioned that the “boost would have to be dramatic to alleviate the longer-term pressures on the public finances.”

J-Curve Economics

The OBR examined multiple studies with wide-ranging views on AI’s economic impact. It concluded that AI is more likely to follow a J-curve pattern—benefits starting slowly before accelerating—rather than an S-curve where gains occur quickly then level out.

The watchdog estimates around 40% of jobs could be materially impacted by AI in the next decade, though most roles would be complemented rather than replaced. Finance and professional services face the highest exposure.

If productivity growth averaged 0.4 percentage points higher across the forecast period, it would generate £44bn in extra tax revenue and a healthy surplus by 2030/31. For context, Reeves recently raised taxes to achieve a fiscal buffer of just £22bn.

Looking Forward

Bank of England Governor Andrew Bailey has hailed AI as a potentially game-changing general purpose technology, comparable to the industrial revolution and computers. However, the BOE has yet to include significant AI impact in its forecasts.

Rate-setter Megan Greene suggested this may change: “We might judge differently the next time around because a lot has changed.” The big risk, according to analysts, is that AI adoption causes significant labour market disruption, limiting the overall economic boost—particularly if it follows the J-curve trajectory the OBR considers most likely.

Source: Bloomberg