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 doby 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.