UK's Reeves painted bleak economic picture despite having better news, OBR letter shows

MANCHESTER, England (Reuters) -British finance minister Rachel Reeves painted a bleak picture of the economy this month while she was in possession of forecasts that showed better-than-expected news for the public finances, a letter from the fiscal watchdog showed on Friday.

Reeves appeared to lay the groundwork in a speech early on November 4 to break a political promise and raise income tax rates, citing a "weaker than previously thought" productivity performance.

In a letter published on Friday, the head of the Office for Budget Responsibility said it had also provided the government with forecasts showing that its productivity downgrade had been offset by increases in real wages and inflation.

The letter adds to questions over the government's communications ahead of Wednesday's budget. November saw big swings in the British government bond market as investors grappled with shifts in tone from the government over the prospect of tax increases.

OBR chair Richard Hughes said in the letter the government received forecasts showing a 0.3 percentage point cut in underlying productivity growth in forecasts sent to the finance ministry during September and October.

But other aspects of the forecast had countered the productivity downgrade - something not apparent in Reeves' speech.

"Our Round 1 forecast was also a full forecast and therefore also included increases in real wages and inflation which offset the impact of the productivity downgrade on receipts," Hughes wrote.

In response, the finance ministry said it was not going to get into the OBR's processes or speculate on how that related to internal decision making in the build-up to a budget.

"We take budget security extremely seriously and believe it's important to preserve a private space for Treasury–OBR policy and forecast discussions, so we welcome the OBR's confirmation that this will not become usual practice," it said, of the OBR's letter about the process.

A spokesman for British Prime Minister Keir Starmer said he did not accept that the government has misled the public or markets.

"We have made fair, necessary choices to build a stronger, fairer country where living standards rise, where child poverty falls and public services are renewed in every corner of Britain," he said.

On Thursday, Hughes said he would resign if Reeves and lawmakers demanded it, after the OBR released details of the budget early, moving markets and sparking anger in parliament.

(Reporting by Andy Bruce; Editing by Aidan Lewis)