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Saturday, Feb 22, 2025

Rishi needs to make our productivity problem his number one priority

Rishi needs to make our productivity problem his number one priority

Apparently, there’s not much on television tonight so, for those who find themselves at a loose end, I can heartily recommend a read of the Office for Budget Responsibility’s (OBR’s) March 2021 economic and fiscal outlook.
There are pages and pages of useful charts and tables. What more could you possibly need on a cold Monday night?

For those who do opt to read this compendium of economic soothsaying, there’s a lot to absorb. In a case of prophets prophesying profits, our official forecasters tell us there will be a strong post-lockdown recovery later in the year. Consumers will be spending. Businesses will be investing, not least because of Rishi Sunak’s so-called tax “super deduction” on investment over the next couple of years.

Thanks to the Chancellor’s assorted tax increases and the Government’s public spending discipline (which may quickly come unstuck if NHS workers successfully overturn a meagre one per cent pay award), the budget deficit is, over the medium term, brought under control.

All of which sounds like rather good news. There are, however, a few rather more sobering observations. The balance of payments is mostly awful, made worse in the short term because our speedy vaccine programme means the UK economy will be recovering faster than others. That means more in the way of imports even as exporters struggle. The OBR thinks the current account deficit in the near term will be the biggest since the end of the Second World War. Meanwhile, even with a strong economic rebound, the OBR thinks the UK economy will be permanently scarred by Covid (thanks in part to reduced output from those unfortunate enough to be suffering from “long Covid”). In the OBR’s “central case”, we are collectively three per cent poorer than we would otherwise have been.

There’s another oddity lurking at the bottom of page 68, one third of the way through the OBR’s modern day take on Nostradamus. Our soothsayers write briefly about the UK’s productivity performance, observing it’s been a bit bumpy during the pandemic. Productivity will recover but, thanks to the aforementioned scarring, it will be lower than might have been hoped pre-pandemic.

This observation is remarkable as much for its brevity as for anything else. Any view on the health of the public finances and, indeed, on the broader economy has to take productivity into account.

Commonly measured as “output per hour”, it is the “secret sauce” which determines how quickly our living standards improve, how rapidly a government’s tax revenues rise and, by implication, how generous a government can be with its public spending plans. So much of what the OBR says about the future state of the public finances depends on productivity, yet so little attention is paid to it. If an economic cake is expanding quickly, everyone can end up with a bigger slice, whether or not their share is rising or falling. If the cake refuses to get any bigger, we end up in an unseemly debate about “yours being bigger than mine”.

And this is precisely where we are. In the Seventies, productivity rose at an annual rate just shy of two per cent. In the Eighties and Nineties — consistent with the idea of a “supply-side” revolution— productivity rose at a 2.5 per cent annual clip, implying a doubling of living standards every 30 years.

In the Noughties, the annual pace slowed to1.5 per cent before fading further (blame the global financial crisis) to a mere 0.5 per cent in recent years, implying a doubling of living standards only every 140 years.

The OBR assumes there’ll be a return to the Noughties pace in coming years. Indeed, given that the Chancellor plans to increase the tax burden to a level not seen since the late-Sixties — with a particularly steep increase in corporation tax two years from now — it might well be that productivity continues to limp along at a thoroughly miserable pace.

The Government still has time to address the productivity issue but, as with the apparent breakdown of royal relations, merely assuming the problem will go away may not be enough. Post-pandemic, dealing with productivity — or the lack of it — should become the Government’s number one economic priority.
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