Brexiteers have criticised the organisation—but may have it the wrong way roundby Duncan Weldon / November 25, 2016 / Leave a comment
The Office for Budget Responsibility has found itself under attack from Brexit supporters this week, charged with being too pessimistic on the impact of leaving the EU on the UK economy. Its new forecasts—released at the Autumn Statement—show an additional cumulative £120bn of new borrowing by 2021, with around half of that directly related to June’s referendum result. But in one vitally important way, the OBR may actually still be being too optimistic.
Since its creation in 2010 the OBR, and indeed most other forecasters, have been too upbeat on the UK’s productivity numbers. In its central scenario, the scenario around which most of the public debate has been based, it is once again predicting a gradual productivity recovery. But the process of Brexit may make that even less likely.
To recap, productivity growth is, in the long run, perhaps the most important driver of an economy. The ability to get more economic output from the same number of workers is what drives GDP per capita, wages and ultimately living standards higher. In the absence of decent productivity growth, inflationary pressures are higher and wage rises mean falling profit margins and more intensive distributional battles.
In the three and half decades to 2008, output per work hour rose at an annual rate of around 2.5 per cent but since then it has been broadly flat. After outright falls in 2008 and 2009, the average annual growth rate has fallen below 0.5 per cent in the last five years. The OBR now expects (hopes) that it recovers to 1.8 per cent a year by 2020. That compares to a forecast of 2.2 per cent (still below the trend of the last few decades) this time last year and an estimate of 2 per cent a year at the Budget in March. As the OBR itself noted in its report, “the long-awaited return of sustained productivity growth is the most important judgement underpinning our forecast.”
The OBR has helpfully provided forecast of a “weak productivity scenario” and it is important to be clear that this is a scenario in which productivity growth fails to accelerate from its current growth rates rather than one in which that growth…