The Budget downgrade: productivity crunch

Britain had lost the knack of turning smart ideas into prosperity—even before it had to reckon with Brexit. But there is something we can do

by Diane Coyle / November 13, 2017 / Leave a comment

Published in December 2017 issue of Prospect Magazine

The attention of officials in Brexit Britain is focused, laser-like, on productivity. Away from the world of policy and economics, the term washes over most people as business-speak. For those responsible for policy, however, productivity is not just an important question: it is the question. The Chancellor’s Budget red book—and his scope for spending more on the pressing demands he’s juggling—is framed by estimates about where productivity is heading. That’s because virtually all his numbers are affected by the forecasts of the independent Office for Budget Responsibility (OBR) for growth, which in turn depends on its assumptions about productivity.

The news is not good: as of October, the OBR is assuming that productivity will grow more slowly over the next five years than it had expected, more in line with the 0.2 per cent since the financial crisis, than the pre-crisis average of 2.1 per cent. Up until this autumn, the OBR had spent years assuming that tomorrow we would somehow bounce back towards faster growth. But tomorrow has not come, and the OBR has finally given up predicting it. The big dent in the forecasts for tax revenues that this implies ahead of November’s Budget perhaps explains why it hesitated for so long. Similar pessimism has overcome the Bank of England, with its view that the economy is closer to its (lower) productive potential than it previously thought—the reason why it concluded that interest rates had to rise at the start of November.

NEW: listen to Diane Coyle discuss the post-Brexit economy on the Prospect podcast, Headspace!

For all its influence, there are doubts about how productivity is…

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Comments

Michael Martin
November 18, 2017 at 11:03
This kind of 'productivity' article, like those elsewhere in the media, is useless for most of us because it provides no reason why. Within, I think, the last couple of years, a female economics commentator said that accompanying a statement that UK workers were less productive than, eg, German by an implication that in UK people didn't work as hard as elsewhere in Europe was unfair - for example, they worked longer hours. No-one, apparently, had attempted to discover the reason(s) for this, apparently long-term, comparatively low productivity, and I have seen nothing since in the media, even here and the Economist, that seeks to do so. Has anyone tied, and found it too much of a puzzle? If so, they could at least report that.
John Bruce
November 20, 2017 at 18:04
The only ways you get productivity is by the whip, withholding food and drink until a task is done or slavery , but since those are out then by either offering a reasonable wage with real job satisfaction, profit sharing, or a cause (personal career path or altruistic. The UK offers very little of anything anymore. We have engineered risk out of life so challenge, the use of personal judgement, it is all now diffused to 'stakeholders' so no-one's head rolls anymore and the last thing anyone may use is common sense. We no longer train ourselves to do well but boast endlessly of how good we are - though 23/23 on the OECD ladder in literacy and 21/23 in maths. We have lost the dynamism which inspires and which fuelled the industrial revolution which Health and Safety would deny us today. We have become ever more regulated as our values have fallen away. We have no mechanism today with which to fund winners and even less do we know what has to be dome to get winners - so Dyson was the last and only because he self funded - before that and it was the Hovercraft back in 1956. In a nutshell what bedevils us - not the Current account - is a long acceptance that we simply can't do it anymore. Sp we have to get a man in to run the BoE, manage our footballs clubs, companies et al. We won the war but lost the peace. Brexit is a chance to turn this around but not unless our 'attitude' changes - Sir Nigel Rudd on our industrial strategy.
Jack B.
December 13, 2017 at 20:39
How much of this investment in productivity will get soaked up by rent seekers, eg landowners? Tax reform is key. Let's reduce taxes on productive activity and shift collecting economic rent each eg LVT.