The Zero Productivity Budget

The economic forecast prepared by the Office for Budget Responsibility that accompanied the Budget has not changed greatly from that published alongside the Autumn Statement just over 3 months ago.  A bit more pessimism about world trade growth and the Euro area have been offset by reduced expectations for oil and commodity prices and thus for inflation as a whole, with the result that expected growth in 2015 is now 2.5% rather than 2.4%, with small adjustments in following years. 

As usual, the OBR's forecasts for job creation and unemployment reduction have been amended to take account of the last few months' actual figures and they now expect unemployment to fall to 5.1% for the first half of 2016 before starting to drift up very slightly.  If the growth forecasts turn out to be broadly correct, I suspect these forecasts might yet again need to be revised in future because the OBR appear to underestimate the extent of structural change in the UK labour market.  The detailed tables accompanying the forecast show that the OBR assume the UK's employment rate for everyone aged 16+ has now reached a maximum of 60%, with any future increase in employment being due to population growth.  This assumption has been in the forecasts since December 2013 and a revision seems overdue.  It is connected to the assumption the OBR make about the NAIRU (Non-Accelerating Inflationary Rate of Unemployment) - in simple terms, the lowest level of unemployment the economy can sustain without generating inflationary pressures, see here for a more thorough discussion.  The OBR, the Bank of England and most forecasters, who use economic models based on past data, have been playing 'catch up'.  Large falls in unemployment show that the NAIRU - if it is a useful concept at all - has clearly been falling.  With the current outlook for inflation so benign, steady economic growth could push the rate well below 5% this year or next year.

The other side of this coin, however, is weak productivity performance with output per hour worked still below its pre-recession level.  The OBR forecast has productivity picking up slowly during 2015 and reaching 2%+ by 2016, closer to 'normal' productivity growth (see chart below).  However, there is no guarantee this will happen and there is no 'catch up' for the output loss we saw between 2008 and 2014.

In the circumstances it is surprising that the Chancellor did not refer to productivity once in his Budget speech.  He quoted OECD Secretary-General Angel Gurria's favourable reference to the UK's economic plan at the launch of the UK 2015 Economic Outlook but failed to mention any of Gurria's extensive remarks on improving the UK's productivity performance, which included:

"... perhaps the biggest challenge for the United Kingdom is to make work more productive ..."

"As opposed to past crises, productivity in the UK has not revived during the recovery. Labour productivity has been weak, even compared with other countries which have also enjoyed solid job creation since 2010, such as Canada and the United States." and

"... low investment and weak labour efficiency are two important drivers of the productivity shortfall in the United Kingdom."

We saw some announcements in the Budget designed to encourage investment but we saw little which will make a real difference to labour efficiency - either in encouraging UK employers to develop workforce skills or to use their existing workforce skills effectively.  These are both themes we develop in our Manifesto for Work.  While it is for employers to decide where their competitive advantage lies and how to organise the workforce to deliver on their strategy, there is much that government can do either directly or indirectly through intermediaries to support them, often working at a local or industry level.

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