Final Wednesday noticed the UK Authorities’s Spring Assertion on the economic system: basically a response to a brand new forecast from the Workplace of Budgetary Duty. This was politically painful – a deteriorating forecast signifies that the federal government must both cut back public spending or enhance taxes to ensure that the forecasts to fulfill its self-imposed constraints on public borrowing and the deficit. These forecasts are at all times unsure, and extremely depending on what assumptions are made in regards to the future. This set of forecasts underline how essential productiveness progress – or the shortage of it – is for the power of the federal government to fulfill its commitments.
First, the place are we now? Right here is the newest productiveness knowledge. To recap, as I’ve been discussing for a while now, for a lot of the postwar interval, productiveness within the UK grew at a gradual price of two.1% a 12 months. That modified within the mid-2000s, within the run-up to the worldwide monetary disaster; the expansion price somewhat abruptly dropped to about 0.5% a 12 months. The cumulative impact is that the productiveness of the UK economic system is now some 28% beneath what it might have been if earlier pattern had continued.
UK Labour Productiveness index, quarterly knowledge. The stable blue line is a greatest match to a operate which assumes two durations of exponential progress steady at a break level. See my put up When did the UK’s productiveness slowdown start? for particulars of the becoming methodology. The most effective match parameters are: pre-break progress price: 2.1%, post-break progress price: 0.48%, break at 12 months 2005.2. Knowledge: ONS, Feb 18th 2025 launch.
Taking a extra close-up have a look at the final twenty years, one sees that there isn’t a signal of any restoration of productiveness progress. Quite the opposite, the previous few quarters appear discouraging. I believe it’s most likely too early to conclude that we’re shifting right into a interval of even decrease productiveness progress – one wants to attend some time to see the long-term tendencies, and knowledge is commonly revised. As well as in the meanwhile there’s a fear about high quality of the survey knowledge ONS makes use of to estimate complete hours labored, which provides additional uncertainty.
UK Labour Productiveness index, quarterly knowledge. Knowledge: ONS, Feb 18th 2025 launch, match as within the plot above.
What’s the OBR predicting for the longer term? It’s central forecast is predicated on the belief that productiveness progress will increase by 2029 to a worth which is kind of the common of the pre-break and post-break values – 1.25%, with a rise of 0.2% to the expansion price attributed to planning reforms resulting in extra house-building. It has additionally modelled the impact of an upside state of affairs, the place productiveness progress of 1.2% is achieved in 2025, and a draw back state of affairs persevering with latest decrease pattern progress of 0.3% a 12 months.
UK Labour Productiveness index, annual knowledge, along with the OBR’s March 2025 eventualities for productiveness progress as much as 2029. Gray is the principle March forecast, yellow & inexperienced are excessive and low productiveness progress eventualities.
The subsequent plot, from the OBR report, exhibits how a lot distinction assumptions about productiveness progress make to the fiscal projections. With out the belief that productiveness progress is about to extend considerably over the pattern it’s adopted for the final 15 years, the federal government’s fiscal targets for the debt and the deficit can’t be met. On this state of affairs, the federal government would want both to chop public spending additional or enhance taxes to fulfill these targets.
Impact of the completely different productiveness progress eventualities on the OBRs fiscal forecasts. From the March 2025 Financial and Fiscal Outlook.
So, massive selections in regards to the UK’s fiscal coverage are being made on the premise of predictions of future productiveness progress, and the query of whether or not the federal government will meet its fiscal targets are very delicate to the assumptions being made. How a lot credence can we place on these forecasts? It does should be burdened that the OBRs document on predicting productiveness progress has been constantly overoptimistic since its institution, because the plot beneath exhibits. I believe this displays a wider failure by the UK’s financial and policy-making group to understand the size of the change to the UK economic system within the Nineteen Nineties and 2000s and its long run results. There isn’t a extra essential financial coverage query than to know the causes of the productiveness slowdown – and to seek out insurance policies to reverse this.
Successive OBR forecasts of productiveness and outturn. Supply: OBR