Productivity puzzle troubles UK forecasters

Chris Papadopoullos
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THE GOVERNMENT’S fiscal watchdog yesterday expressed a great degree of uncertainty in its economic forecasts.

“The key judgement underpinning our [growth] forecast is about the return of sustained productivity growth,” the Office for Budget Responsibility (OBR) said in its Economic and Fiscal outlook.

Productivity is the amount of output produced by a worker in a single hour. Its growth has been subdued since the financial crisis and the OBR says there is no single answer to why it has not recovered. This “productivity puzzle” has made predicting a productivity recovery a highly speculative task.

If productivity growth stays weak, the economy may only grow by around one per cent per year for the next several years. However, if growth recovers strongly GDP growth could hover around four per cent per year over that time, OBR forecasts say.

The OBR has also cast doubt on the government’s ability to make proposed cuts to public services while keeping promises on ring-fencing certain areas. While noting it would be inappropriate for them to assume such cuts would be unachievable, the OBR says it “might need to include an ‘allowance for overspending’ in our forecasts”.

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