The Office for Budget Responsibility has, it appears, given up on the long hoped for productivity spurt. Chris Giles reported in the FT last week that it is to release a more pessimistic productivity forecast in this year’s budget.
For a time, a couple of years ago, it looked as though productivity might be on the rise again but it has stalled recently. The take-off never came. The ONS figures released on Friday show output per hour and per worker more or less where they were at the end of 2007. That’s almost a decade without any productivity growth.
As Gemma Tetlow explained, although employment is at record levels, much of the increase has been in the economy’s least productive sectors and firms, which has created a drag on productivity.
Britain’s productivity woes have deepened in the past year because less productive services companies have hired more staff, while higher value manufacturing has shrunk.
Albert Bravo–Biosca and Stian Westlake noticed something similar when they looked at the allocative efficiency of the UK economy in the decade before the recession. The net effect of new firms coming into the market, they found, was to reduce productivity; the opposite of creative destruction.
It appears that, after a brief post-recession respite, the economy reverted back to its tendency to create low productivity jobs.
Chart by Gemma Tetlow, FT
Also released last week were the ONS measures of economic well being. The ONS points out that the overall household income level didn’t fall as much as other measures because low interest rates reduced mortgage payments. That this effect is now spent as inflation is starting to bring down real household incomes. The general picture is that, whatever measure you use, the economy has barely recovered from the shock it experienced a decade ago. The UK’s post-recession increase in GDP is, therefore, mostly accounted for by an increase in population.
As the Resolution Foundation’s Matt Whittaker said, we can’t blame Brexit for all of this (my emphasis):
The bigger picture here is that household income per person remains no more than 5 per cent higher today than it did a decade ago. The decade before the crisis delivered growth in the region of 30 per cent. It’s easy to fixate on the impact on Brexit, but it shouldn’t blind us to other domestic challenges that have led to a tough ten years for living standards, let alone the last 12 months.
The OBR looks set to adopt a more pessimistic stance by downgrading its productivity projection at the forthcoming budget. That decision is being driven not by an assessment of lower productivity in a post-Brexit world (previous OBR outlooks have already incorporated some such assumptions), but rather by the conclusion that post-crisis productivity stagnation is more permanent than previously thought.
That’s the worrying bit. We were running into productivity problems before 2007 and the recession just made them worse. The British economy’s weaknesses, it seems, run deep.
The OBR has come to the conclusion that we are not likely to see much improvement in the near future. That is likely to mean less tax revenue and, most probably, a significant hit to the public finance projections in next month’s budget.
It’s only two years since the OBR found some money for George Osborne down the back of the sofa. Philip Hammond won’t be so lucky. The sofa is on the skip. Until productivity improves we won’t get a new one.